Trade Deficit Widens as Consumer Spending Remains Strong, Job Market Still Healthy

- The Trade Deficit for August widened to -$69.9 billion versus estimates of -$66.7 billion and -$68.0 billion in July.
- Initial Jobless Claims for last were 308K versus estimates of 311K and 304K the prior week.
- Continuing Claims were 2445K versus estimates of 2445K and 2440K prior.

BOTTOM LINE: The US trade deficit unexpectedly widened to $69.9 billion in August on a surge in imports related to strong consumer spending in the US, Bloomberg reported. US exports rose 2.3% to $122.4 billion. Consumer products imported rose $678 million to an all-time high in August, boosted by apparel, TVs and appliances. The value of crude oil imports rose to $27.2 billion as the average price of oil increased to $66.12/bbl. from $64.84. Oil has since plunged over 20% which should help lower the trade deficit going forward.

First-time claims for jobless benefits rose slightly last week from a 2-month low to a level that is still consistent with a resilient labor market, Bloomberg said. The four-week moving average of claims fell to 313,250 from 314,000 the prior week. Economists are now saying weekly jobless claims may be a better gauge of the health of the job market after the Labor Department disclosed last week that it had undercounted payrolls by almost 1 million workers over the last 12 months. The unemployment rate is 4.6%, low by historic standards. The unemployment rate among those eligible for jobless benefits, which tracks the unemployment rate, held steady at a low 1.9%. Job growth is averaging 137,000 a month so far this year, above the 100,000 needed to keep unemployment from rising. I continue to believe the job market will remain healthy over the intermediate-term without generating substantial unit labor costs increases.

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Thursday Watch

Late-Night Headlines
Bloomberg:
- Crude oil traded near a 10-month low in NY on speculation OPEC won’t enforce a production cut as demand growth slows.
- South Korea’s central bank kept its benchmark interest rate unchanged for a second month as sliding fuel costs damped inflation and consumer spending slackened.
- UTStarcom Inc.(UTSI), the biggest supplier of wireless telephone systems in China, hired Merrill Lynch(MER) to explore options to help boost a stock that has dropped almost 80% since August 2003.
- CB Richard Ellis Group(CBG), the world’s largest provider of commercial property services, will join the S&P 500 Index, replacing BellSouth Corp.(BLS) after its purchase by AT&T(T).
- US ethanol producers are forging ahead with expansion plans even with construction costs rising and prices for the grain-based fuel half their levels in July, VeraSun Energy(VSE) CEO Endres said.
- AT&T’s(T) $79 billion purchase of Bellsouth(BLS) hit a regulatory snag as the FCC postponed a vote on the deal scheduled for tomorrow.
- Imports of refined copper and copper products into China, the world’s biggest user of the metal, fell 24% in the first nine months of the year, from a year ago.
- Butch Kezner, chief executive officer of Kerzner International, has died in a helicopter accident in the Dominican Republic, the company said in a statement issued in Singapore today.

Commercial Times:
- Samsung Electronics’ orders of electronic parts, such as liquid-crystal displays, from Taiwan suppliers may reach $3.2 billion this year. That would be 60% more than Samsung ordered from Taiwan suppliers last year. AU Optronics(AUO) and Chi Mei Optoelectronics are among the companies that supply Samsung.

Late Buy/Sell Recommendations
- None of note

Night Trading
Asian Indices are unch. to +.25% on average.
S&P 500 indicated +.01%.
NASDAQ 100 indicated -.06%.

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Earnings of Note
Company/EPS Estimate
- (APOL)/.66
- (GENZ)/.71
- (HDI)/1.10
- (MTG)/1.56
- (PII)/1.07
- (WGO)/.39

Upcoming Splits
- None of note

Economic Releases
8:30 am EST:
- The Trade Deficit for August is estimated to shrink to -$66.7 Billion versus -$68.0 billion in July.
- Initial Jobless Claims for last week are estimated to rise to 311K versus 302K the prior week.
- Continuing Claims are estimated to fall to 2445K versus 2448K prior.

10:30 am EST:
- Bloomberg consensus estimates call for a weekly crude oil build of 1,500,000 barrels versus a 3,355,000 barrel increase the prior week. Gasoline supplies are expected to fall by 450,000 barrels versus a 1,153,000 build the prior week. Distillate inventories are estimated to fall by 125,000 barrels versus a 178,000 barrel increase the prior week. Finally, Refinery Utilization is expected to fall .4% versus a 2.5% decline the prior week.

2:00 pm EST:
- Fed’s Beige Book
- The monthly budget surplus for September is estimated at $52.0 Billion versus $35.7 Billion in August.

BOTTOM LINE: Asian indices are slightly higher, boosted by technology and industrial 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 Lower on Profit-taking, FOMC Comments and NYC Plane Crash Worries

Indices
S&P 500 1,349.95 -.26%
DJIA 11,852.13 -.13%
NASDAQ 2,308.27 -.31%
Russell 2000 741.71 -.56%
Wilshire 5000 13,484.90 -.30%
S&P Barra Growth 625.49 -.33%
S&P Barra Value 722.50 -.18%
Morgan Stanley Consumer 654.83 +.09%
Morgan Stanley Cyclical 845.13 -.47%
Morgan Stanley Technology 542.14 +.05%
Transports 4,592.53 -1.03%
Utilities 433.11 +.12%
Put/Call .91 +13.75%
NYSE Arms .89 +26.47%
Volatility(VIX) 11.62 +.87%
ISE Sentiment 121.0 -1.6%
US Dollar 87.10 +.09%
CRB 297.81 -.53%

Futures Spot Prices
Crude Oil 57.50 -1.74%
Unleaded Gasoline 144.61 -1.28%
Natural Gas 6.14 -4.92%
Heating Oil 166.80 -.77%
Gold 576.50 unch.
Base Metals 234.80 -.54%
Copper 341.80 +.26%
10-year US Treasury Yield 4.77% +.55%

Leading Sectors
Semis +1.29%
Airlines +.44%
HMOs +.38%

Lagging Sectors
Gold & Silver -2.09%
Oil Service -2.24%
I-Banks -3.90%

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Afternoon Recommendations
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Afternoon/Evening Headlines
Bloomberg:
- Crude oil plunged to the lowest this year in NY, falling over $1/bbl. to $57.46/bbl. on speculation OPEC won’t cut production enough to stem falling prices. Oil has declined $21/bbl. or 27% in less than three months on slowing global growth, increasing global supplies, a stronger US dollar and less speculation by investment funds.
- A small plane crashed into a 50-story apartment building on Manhattan’s Upper East Side, exploding in a fireball that engulfed at least one floor. Four people died, including NY Yankees pitcher Cory Lidle.
- The North American Aerospace Defense Command said it sent fighter jets over “numerous” US cities in response to a small plane crashing today into an apartment building on NY’s Upper East Side.
- US natural-gas inventories may have climbed by 63 billion cubic feet last week to another all-time high, according to trading in options and forward contracts tied to a weekly report form the US energy department.
- US home foreclosures fell 2.7% in Sept., according to RealtyTrac Foreclosure report.

AP:
- Democratic Senate Minority Leader Harry Reid may have failed to properly report transactions connected to land that netted him a $1.1 million profit, citing property deeds, records and interviews.

BOTTOM LINE: The Portfolio finished slightly lower today on losses in my Telecom longs and Retail longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was slightly negative today as the advance/decline line finished modestly lower, sector performance was mixed and volume was above average. Measures of investor anxiety were higher into the close. I would again classify today's overall market action as a healthy consolidation of recent gains. The 10-year yield only rose 2 basis points on the day, despite supposed "hawkish" comments in the FOMC minutes. I suspect the mild rise was more related to the "better retail sales" and "accelerating growth in 2007" comments in the FOMC minutes. Most of today's losses were confined to the I-banking and commodity sectors. Tech stocks, specifically semis, performed quite well. I suspect the terrorism-related sell-off this afternoon left even more investors leaning the wrong way as I sense bears remain stunningly complacent, given the DJIA is only 25 points off a record high. As well, I continue to believe the majority of bulls are looking for an overbought pullback of 2%-3% and have raised cash accordingly. This bodes well for another substantial push higher in the major averages over the coming weeks.

Stocks Slightly Lower into Final Hour on FOMC Minutes and Small Plane Crash in NYC

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Telecom longs and Retail longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is negative as the advance/decline line is lower, sector performance is mixed and volume is about average. Oil is falling another $1/bbl. despite OPEC production cuts and more calls from large energy speculators for $100/bbl. oil. I continue to believe recent consolidating action is healthy, considering recent gains. I still expect another substantial push higher in the major averages over the coming weeks. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, investment manager performance anxiety and lower energy prices.

Today's Headlines

Bloomberg:
- Crude oil plunged to the lowest this year in New York on doubts that OPEC ministers will come to an agreement to cut production enough to stem falling prices.
- Visa, lured by MasterCard’s 84% gain since it went public in May, plans to sell shares in an offering that may dwarf its credit card rival.
- Sony Ericsson Mobile Communications said third-quarter profit almost tripled on sales of handsets with high-resolution cameras and Walkman music players.
- The US budget deficit is set to come in around 1.9% of GDP, significantly better than prior estimates and lower than the 40-year average of 2.3% of GDP.
- Bill Gross, manager of the world’s largest bond fund at PIMCO, said demand for emerging-market debt may wane as a result of the 25% fall in oil prices.
- Jacuzzi Brands agreed to be bought by Apollo Management LP for about $990 million.

Wall Street Journal:
- News Corp.’s(NWS) Myspace.com wants to expand its relationship with Google(GOOG).
- Bank of America(BAC) will offer up to 30 free online stock trades a month to banking customers with at least $25,000 in deposits.
- Airlines’ share prices are creeping up despite slowing revenue growth, because fuel prices, which account for 20 to 30 percent of carriers’ operating costs, are falling.
- Egan-Jones Ratings may offer ratings of mutual funds by the end of the year, citing the company’s marketing chief.

NY Times:
- Europeans are showing less tolerance toward Muslim immigrants as worries about Islamic extremism spread since the terror attacks of Sept. 11, 2001.
- New York City is to start a program which will steer developers toward building low-cost housing.
- Apollo Management Group and Texas Pacific Group have raised their bid for Harrah’s Entertainment(HET) to more than $15.5 billion.
- A non-profit group in the US plans to provide 1.2 million educational computers for Libyan children by June 2008.
- Yahoo!(YHOO) has fallen out of favor with some advertisers, as new video and social networking sites attract more visitors.

NY Daily News:
- New York City’s Hudson Yards Project will generate more than $25 billion in revenue over 25 to 30 years after development.

Reuters:
- Nigeria’s oil production will probably rise to 2.5 million barrels a day next year, citing President Olusegun Obasanjo. Nigeria’s recent loss of 600,000 barrels a day of oil production will probably last until February.

Boston Globe:
- Election ballots in more than a third of Massachusetts’ cities and towns will ask voters next month whether US troops should immediately be withdrawn from Iraq. Massachusetts Governor Mitt Romney is critical of the initiative, saying he believes troops should return after stability is achieved in Iraq.

Washington Post:
- American households will pay lower heating bills this winter as natural gas bills are forecast to drop for the first time since the winter of 2001.

Les Echos:
- A 700 mile fence between the US and Mexico, approved last month by the US Congress, won’t staunch trade between the two countries, Mexican Foreign Minister Luis Ernest Derbez said.

NKK Television:
- The Japanese government will block all North Korean ships from entering the country’s ports.

AFP:
- Iran may cut 140,000 barrels a day in oil production if OPEC lowers quotas by a total of 1 million barrels a day.

El Nacional:
- Venezuela plans to base spending in next year’s budget on an average oil price of $29 a barrel.