US Budget Deficit as Percentage of GDP Now Below 40-year Average

- The US budget deficit came in at $248 billion in the fiscal year ended Sept. 30 versus prior estimates of $296 billion.

BOTTOM LINE: The US recorded a budget deficit of $248 billion in the fiscal year ended Sept. 30, $48 billion less than the government predicted in August, Bloomberg reported. Revenue to the US Treasury rose 12% from the prior year, mainly due to a 27% surge in corporate income taxes. This is a direct result of the greatest streak of double-digit profit growth gains in US history. The smaller deficit is evidence that “pro-growth policies work,” President Bush said at a press conference today. President Bush met his goal of cutting the deficit in half three years ahead of schedule. Lower individual tax rates increase economic growth, which in turn boosts government tax receipts and helps lower the US budget deficit. A booming housing market, strong stock market and healthy job market have all substantially boosted government tax receipts. The Treasury on Sept. 15 took in an all-time record $85.8 billion in taxes, including a one-day record $71.8 billion in corporate taxes. The US budget deficit as a percentage of GDP is now 1.9%, below the 40-year average of 2.3%.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Bear, Stearns & Co.’s(BSC) Francois Trahan, the top-ranked Wall Street strategist, increased his forecast for where the S&P 500 Index will finish next year, predicting a 15% advance from today’s close.
- Crude oil traded near an eight-month low after falling yesterday on speculation Middle East shipments and a seasonal dip in demand will increase global stockpiles.
- Katie Couric has lost almost 33% of her viewers since she took over as anchor of “The CBS Evening News” and now trails predecessor Bob Schieffer.
- Chevron Corp.(CVX) said it will prepare a proposal for the development of at least three biofuel plants for Ethanex Energy by 2008.
- Nippon Oil, Japan’s biggest petroleum refiner, will cut crude oil processing 25% compared with a year ago this month because of rising stockpiles.
- Amaranth Advisors LLC, the hedge-fund manager that lost $6.6 billion betting on natural gas, bought energy stocks in the third quarter before it was forced to liquidate, according to regulatory filings.
- Rabies was China’s deadliest infectious disease in the first nine months of 2006, with the number of cases surging by 30%, the health ministry said.

Wall Street Journal:
- The US Justice Department will probably approve AT&T’s(T) acquisition of BellSouth Corp.(BLS) for $67 billion with few or no conditions as early as tomorrow.

Financial Times:
- American International Group(AIG) is leading a group set to buy London City Airport for $1.4 billion.

Reuters:
- Ford Motor(F) is recalling more than 139,000 US vehicles because of defects related to door latches, citing the National Highway Traffic Safety Administration.

Late Buy/Sell Recommendations
Merrill Lynch:
- Emerging-market stocks may lag behind those in developed countries until year-end because they are still vulnerable to “sulks and tantrums” in the face of a slowdown in global economic growth.

Night Trading
Asian Indices are unch. to +.25% on average.
S&P 500 indicated -.10%.
NASDAQ 100 indicated -.09%.

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Earnings of Note
Company/EPS Estimate
- (NDN)/.07
- (GCI)/1.11
- (LRCX)/1.03
- (MTB)/1.83
- (MON)/-.21
- (PGR)/.50
- (RI)/.36

Upcoming Splits
- None of note

Economic Releases
2:00 pm EST:
- Minutes of Sept. 20 FOMC Meeting

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

Dow Jones Industrial Aveage Makes Another All-time High as Oil Drops Again

Indices
S&P 500 1,353.42 +.20%
DJIA 11,867.17 +.08%
NASDAQ 2,315.43 +.16%
Russell 2000 745.88 +.18%
Wilshire 5000 13,525.25 +.24%
S&P Barra Growth 627.56 +.16%
S&P Barra Value 723.82 +.25%
Morgan Stanley Consumer 654.23 -.03%
Morgan Stanley Cyclical 849.10 +.78%
Morgan Stanley Technology 541.87 -.09%
Transports 4,640.32 +1.28%
Utilities 432.61 +.87%
Put/Call .80 -16.67%
NYSE Arms .69 -35.65%
Volatility(VIX) 11.52 -1.37%
ISE Sentiment 148.0 +20.3%
US Dollar 87.02 +.54%
CRB 299.40 -1.37%

Futures Spot Prices
Crude Oil 58.58 -2.30%
Unleaded Gasoline 146.78 -1.81%
Natural Gas 6.53 +1.57%
Heating Oil 168.18 -2.77%
Gold 577.40 +.21%
Base Metals 236.08 -.79%
Copper 339.0 +.36%
10-year US Treasury Yield 4.75% +1.23%

Leading Sectors
Oil Service +2.18%
Homebuilders +2.03%
Energy +1.60%

Lagging Sectors
Networking -.77%
HMOs -.77%
Hospitals -.77%

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Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- US gasoline at the pump fell for a ninth week, dropping 4.9 cents to a nationwide average $2.26 a gallon, the DOE said.
- Crude oil fell another $1.37/bbl.to $58.59/bbl., the lowest since February, after Saudi Arabia’s state oil company told customers in Asia and Europe to expect no cutbacks in their supplies next month.
- Symantec(SYMC) will release a series of Internet-based products and services to stave off growing competition from Microsoft(MSFT). As part of the effort, dubbed “Security 2.0,” Symantec will support VeriSign’s(VRSN) Identity Protection Service, which lets consumer use one-time passwords to protect their identities, and will work with Accenture(ACN).
- UK Prime Minister Tony Blair said his cabinet minister Jack Straw’s request for an open debate on Muslim women wearing full face veils was “perfectly sensible,” citing Blair.
- Two Hollywood studios will begin selling movie downloads through Apple Computer’s(AAPL) iTunes online store within the next six months, according to Piper Jaffray analyst Gene Munster.
- Legg Mason(LM) said fiscal second-quarter earnings were lower than analysts’ estimates because of a decline in revenue and higher distribution costs.
- Alcoa(AA) said rising prices drove third-quarter profit 86% higher, less than analysts estimated. The shares fell 9.5% in after hours trading.
- Genentech(DNA) said third-quarter profit rose 58% on sales of cancer medicines and a new treatment for age-related vision loss.

BOTTOM LINE: The Portfolio finished slightly lower today on losses in my Semi 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 slightly positive today as the advance/decline line finished about even, sector performance was mixed and volume was about average. Measures of investor anxiety were mostly lower into the close. Overall, today's market performance was neutral. I would classify today's action as a healthy consolidation of recent gains. Under Armour (UARM) the finished the day at record highs on above average volume and call activity. There are more acquisition rumors floating around. I remain long the stock. The bears were again unable to gain downside traction this morning. I suspect this will remain the case until the current extraordinary bearish complacency comes to an end.

Stocks Slightly Lower into Final Hour after New DJIA Intraday High

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Internet 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 about even, most sectors are lower and volume is about average. In my opinion, the recent sell-off in bonds, which I suspected may occur, is a result of many macro funds trimming their bets that the U.S. economy will experience a hard landing. I view this as a positive as inflation worries continue to diminish. I believe it would take a move in the 10-year yield to around 5.25% before the Fed would become concerned. I find this highly unlikely over the intermediate term. Global growth is still slowing despite a likely bounce back to around 3% in U.S. growth this quarter. I remain long a small portion of my original iShares Lehman 20+ Year Treasury Bond (TLT) position. I will look to add back to this long on any further substantial sell-off from current levels. Engadget is reporting that it is hearing from multiple trusted sources that Apple Computer (AAPL) will unveil a new wireless widescreen video iPod in the very near future. This would provide another catalyst for the stock to smash through its all-time high this quarter. Apple remains my second-largest long position behind Google (GOOG). I expect US stocks to trade mixed-to-higher into the close from current levels as short-covering, less pessimism, performance anxiety and lower energy prices more than offsets higher long-term rates.

Today's Headlines

Bloomberg:
- Crude oil fell below $59 a barrel in NY after Saudi Arabia’s state oil company told customers in East Asia and Europe to expect the same quantity of oil in November as this month, undercutting OPEC’s plans to cut output.
- OPEC President Edmund Daukoru wrote a letter to the group’s 11-members calling for an output cut of 1 million barrels a day effective from Nov. 1 in an effort to bolster falling prices.
- Homeowners in the US can expect to pay an average 13% less for natural gas this winter than they did a year earlier, as prices have plunged and inventories surged.
- Federal Reserve Bank of Dallas President Richard Fisher said he’s “comfortable” with the central bank’s current interest-rate stance.
- Broadcom(BRCM) failed to win a US judge’s support for a proposed import ban on cell phones that use Qualcomm’s(QCOM) newest chips.
- The US dollar reached its highest this year against the yen.
- ImClone Systems(IMCL) said its chairman and another director resigned, moving billionaire investor Carl Icahn a step closer to taking control of the biotech company.
- House Speaker Hastert said he would fire anyone who helped hide Representative Foley’s electronic messages to teenage congressional pages.
- US Treasuries declined, pushing 10-year yields to a three-week high, on speculation government reports this week will show faster growth in the world’s biggest economy.
- Corn prices in Chicago fell the most since August on speculation that US farmers are increasing sales as they harvest their second-largest crop ever.
- Alaska and the western half of the US will get warmer-than-normal weather this winter, courtesy of El Nino, US meteorologist Michael Halpert said at an energy conference.
- Vedanta Resources, India’s largest producer of copper and zinc, said second-quarter metals output rose after the company opened new smelting plants.

Wall Street Journal:
- US airlines bumped 40% more passengers in the second quarter than a year earlier.
- North Korea’s claim of conducting a nuclear test may give the US leverage on Iran, which has rejected international calls to discuss its nuclear program. Consensus on Iran sanctions may be hard to reach because all UN Security Council members except the US have substantial trade and finance ties with Iran.
- Fidelity Investments’ Charitable Gift Fund, the largest US donor-advised fund, is dropping its initial minimum contribution to $5,000 from an earlier range of between $10,000 and $25,000, depending on circumstances.
- The State of Connecticut Department of Banking has started a unit to work with the state Attorney General’s office to investigate fraud in hedge funds.

NY Times:
- The FDA is holding its first public hearing today on nanotechnology in food products, as use for the research may total $5.8 billion by 2012.
- The active-duty US military reached its recruiting goals this year.

AP:
- Harley-Davidson(HDI) and ConAgra Foods(CAG) plan to jointly market a beef jerky to build business in the growing market for meat-based snacks.
- GameStop(GME) plans to accept pre-orders for Sony’s(SNE) PlayStation 3 game console in its stores Tuesday due to an “extremely limited supply.”

Tongling Daily:
- Tongling Nonferrous Metal Inc. plans to expand copper output by more than 50% within 3 years, which may make the company one of the world’s top five producers.

Liberte-Algerie:
- Algeria calculated its 2007 public budget on the assumption that the average price of its crude oil will be $52/bbl.

AFP:
- The judge at Saddam Hussein’s genocide trial in Baghdad expelled the former Iraqi dictator from court following an altercation between the two men.
- A bombing in the southern Philippines, which killed 12 people and injured dozens, may have been carried out by Muslim extremists.

Gulf News:
- Borders Group(BGP) plans to open its first Middle East outlets in the United Arab Emirates and Oman.

London-based Times:
- Anheuser-Busch(BUD) may receive a $56-a-share bid from billionaire investor Eddie Lampert’s ESL Investments.