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Tuesday Watch

Late-Night Headlines
Bloomberg:
- The US and European Union are considering a package of economic incentives to offer Sudan’s government in exchange for its cooperation in ending the humanitarian crisis in Darfur, diplomats said, as the US was set to name a special envoy to the region.
- China and India are accelerating development of wind power, luring companies including turbine maker Vestas Wind Systems A/S.
- The yuan rose after the daily fixing rate was set at the highest since a decade-long dollar peg ended last year, on speculation US Treasury Secretary Henry Paulson, arriving in Beijing today, will press China for faster gains.
- International Monetary fund Managing Director Rodrigo de Rato said global economic growth may be peaking, prodding policy makers to reach agreement on a new trade deal or risk a deeper slowdown.

Financial Times:
- Demand for solar cells is creating a shortage of silicon, the raw material also used to make semiconductors, the price of which has more than doubled in three years.

AFP:
- An unsuccessful attempt to assassinate Somali President Abdullahi Yousuf Ahmed was the work of the al-Qaeda terrorist network.

China Daily:
- Sales of air conditioners in China fell 16.7% over the past 12 months, the first decline since 1991.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (NFLX), target $30.
- Reiterated Buy on (HEW), target $28.

Night Trading
Asian Indices are +.25% to +.50% on average.
S&P 500 indicated -.11%.
NASDAQ 100 indicated unch.

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Earnings of Note
Company/EPS Estimate
- (AZO)/2.79
- (CBRL)/.78
- (CHAP)/1.04
- (CBK)/.20
- (DRI)/.58
- (FDS)/.42
- (ORCL)/.16
- (PRGS)/.36

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- The Producer Price for August is estimated to rise .3% versus a .1% gain in July.
- The PPI Ex Food & Energy for August is estimated to rise .2% versus a .3% decline in July.
- Housing Starts for August are estimated to fall to 1746K versus 1795K in July.
- Building Permits for August are estimated to fall to 1740K versus 1763K in July.

BOTTOM LINE: Asian indices are higher, boosted by commodity and automaker shares in the region. I expect US equities to open modestly higher and to fade into the afternoon, finishing mixed. The Portfolio is 100% net long heading into the day.

Stocks Finish Mixed, Consolidating Recent Gains

Indices
S&P 1,321.18 +.10%
DJIA 11,550.00 -.05%
NASDAQ 2,235.75 +.01%
Russell 2000 728.84 -.07%
Wilshire 5000 13,204.28 +.08%
S&P Barra Growth 614.53 +.07%
S&P Barra Value 704.30 +.13%
Morgan Stanley Consumer 648.07 -.42%
Morgan Stanley Cyclical 818.59 +.34%
Morgan Stanley Technology 522.25 +.05%
Transports 4,430.86 +.62%
Utilities 425.20 -.17%
Put/Call .98 +20.99%
NYSE Arms .75 -35.10%
Volatility(VIX) 11.78 +.17%
ISE Sentiment 80.00 +14.29%
US Dollar 85.78 -.23%
CRB 308.15 +.36%

Futures Spot Prices
Crude Oil 63.84 +.81%
Unleaded Gasoline 158.00 +.32%
Natural Gas 4.98 -.02%
Heating Oil 172.75 +1.48%
Gold 592.30 -.08%
Base Metals 220.39 -1.06%
Copper 341.00 -.13%
10-year US Treasury Yield 4.80% +.33%

Leading Sectors
Oil Service +3.24%
Gold & Silver +3.08%
Energy +2.60%

Lagging Sectors
Gaming -1.17%
Hospitals -1.23%
HMOs -1.51%

Evening Review
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Afternoon Recommendations
Deutsche Bank:
- Rated (MVSN) Buy, target $30.

Citigroup:
- Rated (BNI) Buy, target $85.
- Rated (CNI) Buy, target $85.
- Rated (CSX) Buy, target $39.
- Rated (NSC) Buy, target $52.

Afternoon/Evening Headlines
Bloomberg:
- US gasoline at the pump fell for a sixth straight week, dropping 12.1 cents to a nationwide average of $2.49/gallon., a government report showed.
- Target Corp.(TGT) said September sales will rise around 5% versus prior estimates of a gain of 3-5%.
- Natural gas fell for the fourth day in five in NY with inventories of the furnace and power-plant fuel at a record high for this time of year.
- T-Mobile USA, Verizon Wireless and a partnership of cable companies were the highest bidders in a US government sale of airwaves that raised $13.9 billion.
- Mining companies including BHP Billiton(BHP) and Rio Tinto(RTP) may increase spending on exploration by 45% to $7.1 billion this year, a study by Metals Economics Group shows.

Washington Times:
- A Chinese spy ring in Los Angeles that was gathering intelligence about US submarines went undetected for 20 years. When the FBI finally cracked down last October, squabbling between prosecutors and investigators undercut the case.

BOTTOM LINE: The Portfolio finished higher today on gains in my Internet longs, Medical longs and Semi longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was neutral today as the advance/decline line finished slightly lower, sector performance was mixed and volume was above average. Measures of investor anxiety were mostly lower into the close. Overall, today's market performance was neutral. Today's trading had the post-expiration day feel to it. Volume was only around average levels. Commodity stocks and Semis were the best performers. The 10-year yield finished only slightly higher after an afternoon rally in bonds. Tomorrow's PPI should rise less than estimates of a 0.3% increase.

Stocks Slightly Lower into Final Hour on Profit Taking, Technical Selling

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semi and Medical longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is slightly negative today as the advance/decline line is slightly lower, sector performance is mixed and volume is above average. Google (GOOG) is breaking higher today on above-average volume. The stock has risen almost 15% since July lows on relatively little new news. I suspect this is a result of P/E multiple expansion, especially in the growth stock arena. Google has been severely under-priced, in my opinion, relative to its fundamentals. I still believe the stock is in the early stages of another substantial move higher. It remains my largest long position, with Apple Computer (AAPL) now a close second. It isn't too late to buy either, in my opinion. I expect US stocks to trade modestly higher into the close from current levels on short-covering and bargain hunting.

Today's Headlines

Bloomberg:
- Amaranth Advisors LLC, a hedge-fund manager with $9.5 billion in assets, told investors its two main funds fell almost 50% this month because of a plunge in natural gas prices. Last month, MotherRock LP, a $400 million fund run by former NY Merc President Robert “Bo” Collins, went bust after natural-gas futures fell 68% from their Dec. 13 peak.
- Confidence among US homebuilders dropped again this month as sales slowed and profits dropped, according to a private survey released today.
- Ed Keon, chief investment strategist at Prudential Equity Group LLC forecasts the S&P 500 will rise to 1,600 in 2007, a 21% gain from current levels.
- Iran warned the UN Security Council that “hostile” actions prompted by the country’s nuclear work will trigger a reduction in cooperation with the UN.
- Shares of Freescale Semi(FSL) gained after the maker of mobile-phone chips, agreed to be bought for $17.6 billion by investors led by Blackstone Group LP in the biggest technology buyout ever.
- Aeneas Capital Management LP, the hedge fund company run by former SAC Capital Advisors LLC money manager Thomas Grossman, is under investigation by regulators in the US and Malaysia after bets on Malaysian stocks caused losses of about 60% in on of its funds.
- German investor confidence probably dropped to the lowest in more than five years in September as higher interest rates and a planned tax increase dimmed the outlook for economic growth, a survey of economists showed.

Wall Street Journal:
- RealNetworks(RNWK), a maker of Internet music and video software, will announce today an agreement with SanDisk(SNDK) to sell a digital music device that competes with Apple Computer’s(AAPL) iPod.
- DaimlerChrysler AG’s(DCX) “Dr. Z” advertising campaign in the US, which feature TV commercials starring Dieter Zetsche, the carmaker’s CEO, is failing to attract buyers and should be axed, according to advertising analysts.
- US credit card issuers including JPMorgan Chase(JPM) are giving customers more choice in the way they collect loyalty rewards.
- The US already has a form of temporary immigrant work permit in place using resident green cards that offers a model for the kind of program now being debated.
- Sageview Capital LLC, an investment company started by two former Kohlberg Kravis Roberts employees, will say today that it’s bought a stake in Guitar Center(GTRC).
- A degree from a top US college isn’t needed to succeed in business because becoming head of a company is often more the result of personal ambition than schooling.
- World leaders should support the International Compact for Iraq, an Iraqi plan to become financially independent within 5 years, Robert Kimmitt, US deputy Treasury secretary, wrote.

NY Times:
- Researchers at Intel Corp.(INTC) and the Univ. of California, Santa Barbara, have created a silicon-based chip that can produce laser beams.
- Research in Motion(RIMM), which became dominant in the handheld device market with its BlackBerry for business people, is introducing the Pear, a version for consumers.
- Twenty-five of about 31 tribes in Iraq’s strife-torn Anbar province have agreed to join forces and fight al-Qaeda loyalists and other foreign-born insurgents.

Washington Times:
- A top special operations policy maker at the US Dept. of Defense said he will step down in the coming months, a move Bush administration officials say resulted from the reorganization in Defense Secretary Rumsfeld’s office.

NY Post:
- The first NYC school testing program revealed that almost 10% of teenage girls are infected with a sexually transmitted disease and many don’t know it.

Harvard Crimson:
- Alumni giving to Harvard College, the university’s undergraduate core, fell to a 17-year low in the fiscal year that ended June 30.

Newsweek:
- Royal Dutch Shell Plc CEO Van Der Veer said future oil prices will fall significantly because crude-oil inventories are normal and there’s no physical shortage. Multinational companies such as Shell are able to compete with state-owned energy businesses because they can use technology to get oil and gas from unconventional sources such as oil sands, oil shale and deepwater reserves.

Milliyet:
- Turkish President Ahmet Necdet Sezer called for non-government run religious schools and courses to be abolished. Such schools, often run by congregations or sects, were using “dogma and false beliefs” to influence students.

al-Hayat:
- Iraq may increase crude oil exports by 200,000 barrels a day during the next two months.

Current Account Deficit Widens, Net Foreign Security Purchases Decelerate

- The 2Q Current Account Balance widened to -$218.4 billion versus estimates of -$214.0 billion and -$213.2 billion the prior quarter.
- Net Foreign Security Purchases for July fell to $32.9 billion versus estimates of $70.0 billion and $75.1 billion in June.

BOTTOM LINE: The US current-account deficit widened more than forecast last quarter as the trade gap widened and more interest was paid to overseas investors, Bloomberg reported. US investors received less income on their holdings of international securities than foreigners received in the US, which helped widen the deficit. I expect the current account deficit to improve only modestly over the intermediate-term as falling commodity prices are mostly offset by the US economy’s relative strength versus other industrialized economies.

International investors slowed purchases of US securities in July as demand for Treasury notes fell after yields declined, Bloomberg reported. International purchases of US stocks rose $10.4 billion versus a $4 billion decline in June. UK holdings of US securities, which many believe are investors that funnel money from Middle East oil economies through British banks, declined by $11.2 billion. I expect foreign demand for US assets to increase going forward as commodities fall further, inflation decelerates and US relative economic strength increases.