Tuesday Watch

Late-Night Headlines
Bloomberg:
- South Korea’s government is aware North Korea may be preparing to conduct a second nuclear explosion, after a report said US satellites picked up activity at the site of the country’s first test last week.
- Schlumberger Ltd.(SLB), the world’s largest provider of oilfield services, and companies that drill wells and haul pipe are beating energy producers in the stock market. Falling oil prices mean the trend may not last. Services companies are so stretched and rental prices for rigs and exploration equipment so high that things can only go downhill from here, said Steven Yuan, an analyst at Sun Hung Kai Securities, in Hong Kong.

Wall Street Journal:
- Sears Holdings Corp.(SHLD), a discount retailer, opened 99 stores devoted to its preppy Lands’ End clothing unit within its department stores.

Financial Times:
- Morgan Stanley(MS) is near to an agreement that will see its investment and private bankers rewarded for referring business, citing retail brokerage head James Gorman.
- NetJets Europe Ltd., a unit of NetJets Inc., the business-jet fleet operator owned by Warren Buffett’s Berkshire Hathaway Inc., has ordered 30 jets from Raytheon Co.(RTN)

Kyodo News Service:
- Bank of China Ltd., the nation’s second-largest lender, has halted fund remittances to North Korea in at least some of its branches since yesterday.

Shanghai Securities News:
- China’s land prices grew .87% in the second quarter of this year, slower than the .92% first-quarter growth, citing the Ministry of Land and Resources’ research arm.

China Daily:
- Learning to play golf will be made compulsory for students taking business courses at Xiamen University in eastern China.

China Securities Journal:
- China will let state-owned companies listed on domestic markets give stock options to their executives as incentives to improve earnings.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (SCHW), target $22.

CSFB:
- US sheet steel supply is exceeding demand by 5M-7M tonnes. Mill capacity utilization has declined to 83.2% from 87.9% the prior week. Lower utilization rates are often met with lower prices. September steel imports are set to rise 75.3% y-o-y. Service center steel inventories, which are released Oct. 18th, are poised to show a sharp increase.

Night Trading
Asian Indices are -.75% to -.25% on average.
S&P 500 indicated -.14%.
NASDAQ 100 indicated -.19%.

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Earnings of Note
Company/EPS Estimate
- (ASD)/.82
- (ASO)/.53
- (CGNX)/.21
- (CSX)/.51
- (EMC)/.12
- (FRX)/.65
- (FCX)/1.59
- (INTC)/.17
- (IBM)/1.35
- (JEF)/.32
- (JNJ)/.93
- (KEY)/.72
- (LLTC)/.37
- (MAN)/1.03
- (MER)/1.47
- (MOT)/.34
- (NVLS)/.51
- (ODP)/.44
- (STT)/.79
- (SYK)/.46
- (STI)/1.46
- (TSS)/.27
- (UTX)/.96
- (USB)/.66
- (WFC)/.63
- (YHOO)/.11

Upcoming Splits
- (SAY) 2-for-1

Economic Releases
8:30 am EST:
- The Producer Price Index for September is estimated to fall .7% versus a .1% increase in August.
- The PPI Ex Food & Energy for September is estimated to rise .2% versus a .4% decline in August.

9:00 am EST:
- Net Foreign Security Purchases for August are estimated to rise to $56.5 billion versus $32.9 billion in July.

9:15 am EST:
- Industrial Production for September is estimated to fall .1% versus a .1% decline in August.
- Capacity Utilization for September is estimated to fall to 82.2% versus 82.4% in August.

1:00 pm EST:
- The NAHB Housing Market Index for October is estimated at 30 versus a reading of 30 in September.

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

Dow Jones Industrial Average Approaches 12,000, Making Another All-Time High

Indices
S&P 500 1,369.05 +.25%
DJIA 11,980.60 +.17%
NASDAQ 2,363.84 +.28%
Russell 2000 769.48 +.90%
Wilshire 5000 13,717.75 unch.
S&P Barra Growth 633.80 +.32%
S&P Barra Value 733.32 +.19%
Morgan Stanley Consumer 658.53 +.45%
Morgan Stanley Cyclical 862.73 +.88%
Morgan Stanley Technology 555.53 +.13%
Transports 4,728.00 +1.51%
Utilities 436.68 +.35%
Put/Call .79 -5.95%
NYSE Arms 1.04 +16.25%
Volatility(VIX) 11.09 +3.16%
ISE Sentiment 162.00 +10.20%
US Dollar 87.0 -.14%
CRB 308.56 +1.70%

Futures Spot Prices
Crude Oil 59.94 unch.
Unleaded Gasoline 149.17 unch.
Natural Gas 6.44 unch.
Heating Oil 175.65 unch.
Gold 600.50 +.33%
Base Metals 242.34 +.43%
Copper 357.0 -.31%
10-year US Treasury Yield 4.78% -.33%

Leading Sectors
Oil Service +2.97%
Disk Drives +2.46%
Energy +2.18%

Lagging Sectors
Banks -.57%
Wireless -.82%
Telecom -1.13%

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Afternoon Recommendations
CSFB:
- Rated (OKE) Outperform.
- Rated (NFG) Underperform.

Deutsche Bank:
- Rated (PNRA) Buy, target $81.
- Rated (YUM) Buy, target $66.

Afternoon/Evening Headlines
Bloomberg:
- Guatemala led Venezuela after 10 rounds of voting for a Latin American seat on the UN Security Council, as the US lobbied to keep Venezuelan President Hugo Chavez from gaining influence on the panel.
- Attorney Lynne Stewart was sentenced to 28 months behind bars for helping an extremist Egyptian cleric pass messages from prison urging his followers on the outside to launch terrorist attacks.
- Fed Bank of St. Louis President William Poole said the chances of an interest-rate cut and an increase are about equal, without giving a time frame for a change.
- Roche Holding AG and InterMune(ITMN) agreed to collaborate on Hepatitis C drugs in an agreement worth as much as $530 million to InterMune.

Wall Street Journal:
- Wal-Mart Stores(WMT) has agreed to buy Trust-Mart, a Chinese hypermarket chain, for about $1 billion.

Financial Times:
- The European Union plans to introduce new regulations to encourage energy saving to cut the use of energy across the region by 20% by 2020.

BOTTOM LINE: The Portfolio finished higher today on gains in my Biotech longs, Retail 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 positive today as the advance/decline line finished higher, most sectors rose and volume was about average. Measures of investor anxiety were mixed into the close. Today's overall market action was bullish. Over the weekend, several major financial media outlets ran more stories on the probability of $100/bbl. oil. I sense there is tremendous complacency among energy bulls regarding recent losses. I have heard from several trusted sources that some very large funds that have taken significant hits from energy speculation over the last few months have dramatically raised their long bets on oil as it broke below $60/bbl. I continue to believe another significant move lower in oil is coming as this massive speculation unwinds further and many funds liquidate positions to meet year-end redemptions. I still expect oil to trade down to around $50 by year-end, which will likely lead to another large hedge fund blow-up. Oil is now entering its seasonally weak period.

DJIA Approaching 12,000 Heading into Final Hour on Positive Economic Data

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semi longs, Biotech longs and Retail longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, sector performance is positive and volume is about average. This morning Forbes.com reported that OPEC lowered its 2006 global demand growth forecast by 100,000 barrels per day. As well, it cut demand estimates for its oil next year from 28.7 million bpd this year to 28.1 million bpd next. The cartel said 2007 appears "far from robust" and that it is worried about government policies around the world promoting conservation and substitution, as well as the elimination of energy price subsidies in some Asian countries. Moreover, OPEC said it sees non-OPEC production to grow a stronger-than-expected 1.1 million bpd this year and 1.3 million bpd next year. This would be the strongest non-OPEC supply growth since 1984 as demand wanes. OPEC reiterated its belief that there is "a clear imbalance between supply and demand." Finally, it said that by the second quarter of next year excess oil supply could overwhelm storage capacity in OECD countries, which is approaching the all-time high set in 1998.These comments by OPEC, which had been using every opportunity to talk up oil prices and boost speculation over the last few years, are very bearish for oil. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, earnings optimism, stable long-term rates and investment manager performance anxiety.

Today's Headlines

Bloomberg:
- Oil is mostly unchanged after OPEC lowered its 4th quarter global demand growth forecast and said Non-OPEC production is poised to rise the fastest pace since 1984.
- Intel Corp.(INTC) said fourth-quarter sales will be higher than expected because of market share gained from smaller rival Advanced Micro Devices(AMD).
- Charles Schwab(SCHW), the largest US discount broker, said third-quarter profit rose 29% as lower commissions and the biggest stock gains of the year spurred demand from retail investors.
- Carlyle Group and Providence Equity Partners agreed to purchased Open Solutions(OPEN) for about $1.3 billion including debt as buyout firms increase their takeovers of technology companies.
- Mitsubishi Electric Corp., a Japanese maker of robots and other factory gear, said it will be investigated by the US government for alleged antitrust violations related to SRAM memory chips.
- General Motors(GM) said sales volume in China rose 37% to a record in the first nine months from a year earlier as the company added more models in the country.
- Natural gas is rising in NY, rebounding from a 12% slump the past three trading days, as forecasters predicted cooler weather in the Midwest will lift consumption.

Wall Street Journal:
- Tom LaSorda, who heads DaimlerChrysler AG’s(DCX) Chrysler subsidiary, and Joe Eberhardt, the unit’s top marketing executive, will hold the first of a series of meetings with US dealers today aimed at cutting Chrysler’s inventory of 50,000 vehicles.
- More hedge funds are focusing on a single Asian country as investors are willing to take on more risk in the region. There were 301 single-country funds in Asia at the end of 2005, up 31% from the end of 2004.
- Apple Computer’s(AAPL) COO Tim Cook has run the company smoothly from behind the scenes, in contrast to the public profile of CEO Steve Jobs.
- Liz Claiborne(LIZ) has picked Willliam McComb, 43, an executive at Johnson & Johnson(JNJ), as its new CEO.
- UnitedHealth Group(UNH), whose CEO, William McGuire, is stepping down because of an options scandal, has a big reserve of management talent, so it may well be possible for it to get back on track.
- The US Department of Homeland Security will restructure the way it works with local police departments in dealing with tips on terrorist and other attacks.

NY Times:
- The SEC is investigating whether some hedge funds acted on insider knowledge because they lent money to Movie Gallery.
- Procter & Gamble(PG) and JP Morgan(JPM) are among companies that are experimenting with non-traditional advertising to find new customers among visitors to social networking Web sites.

AP:
- Japan must watch out for possible terrorist attacks by North Korea after sanctions were imposed on the country, Deputy Director General Hiroto Yoshimura of the National Police Agency said.
- Yahoo!(YHOO) will carry news clips from 16 CBS Corp.(CBS) television stations across the country.

AFP:
- The chief prosecutor in former Iraqi dictator Saddam Hussein’s first trial hopes the verdict will be delivered in a session scheduled today for Nov. 5.

Interfax:
- Russian industrial output rose an annual 4.1% in September, slowing from 5.6% a month earlier.

Empire Manufacturing Strong, Prices Paid Down 49.1% in 6 Months

- The Empire Manufacturing Index for October rose to 22.9 versus a reading of 11.2 in September.

BOTTOM LINE: Manufacturing in NY state unexpectedly accelerated this month as costs of energy and raw materials eased and shipments increased, Bloomberg said. Manufacturers are investing rising profits in new equipment and re-building inventories to meet strong demand. The prices paid component of the fell to 30.8 versus a reading of 41 in September. The employment component of the index rose to 19.4 versus 12.5 in September. I continue to believe manufacturing will remain relatively healthy over the intermediate-term as companies gain confidence in the sustainability of the current expansion.

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