Tuesday Watch

Late-Night Headlines
Bloomberg:
- Celgene(CELG), the maker of Revlimid and Thalomid blood cancer drugs, will replace AmSouth Bancorp in the S&P 500.
- Rupert Murdoch’s NY Post scored a victory in the NY tabloid wars as circulation surpassed rival Mort Zuckerman’s NY Daily News for the first time.
- SEC Chairman Cox said a company’s level of cooperation in stock-option backdating investigations will be a factor in whether the agency files lawsuits in such cases.
- Japan’s unemployment rate unexpectedly rose, while the number of jobs available held near a 14-year high.
- Daisaku Ueno, named best foreign-exchange analyst in the 10th annual analyst rankings by Japan’s “Weekly Economist” magazine, says the yen will weaken to 120 a dollar due to the interest-rate gap between Japan and the US.
- Microsoft(MSFT) filed more than 50 lawsuits against individuals and companies worldwide, claiming they sold counterfeit copies of its programs using online auction sites including EBay(EBAY).
- Creative Technology reported a wider loss than analysts expected after its music players were outsold 23 to 1 by Apple Computer’s(AAPL) iPods in the US.
- Iron ore prices may decline next year as supplies improve, Luo Bingsheng, vice chairman of the China Iron and Steel Assoc., said before the start of annual talks between miners and China’s steel mills.
- Japan’s household spending fell the most in almost five years and wage growth stalled in September, undermining the Bank of Japan’s case for raising the lowest interest-rates among major economies.
- Japan, the world’s largest consumer of oil after the US and China, said crude oil imports fell 2% in September, marking the fifth straight month of decline.

Financial Times:
- The Commodity Futures Trading Commission, which overseas US futures markets, will tomorrow say it has no plans to extend its supervision to Intercontinental Exchange’s London-based ICE Futures unit. Critics of the current policy said ICE Futures has an advantage over the NY Merc by trading a crude oil contract that uses Nymex prices but isn’t burdened by US regulations.

Late Buy/Sell Recommendations
- None of note

Night Trading
Asian Indices are -.25% to +.50% on average.
S&P 500 indicated +.07%.
NASDAQ 100 indicated +.04%.

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Earnings of Note
Company/EPS Estimate
- (AGR)/.23
- (ADM)/.55
- (ADP)/.43
- (BIDU)/.26
- (BIIB)/.49
- (BJS)/.75
- (CKP)/.32
- (CMG)/.27
- (CNA)/.98
- (CMI)/3.67
- (DWA)/-.01
- (EK)/.19
- (ETR)/1.82
- (EOP)/.15
- (IT)/.07
- (HLT)/.28
- (IACI)/.33
- (KKD)/-.03
- (LTR)/.85
- (MRO)/3.63
- (MSO)/-.18
- (MCK)/.58
- (PG)/.78
- (RDC)/.88
- (RCL)/1.59
- (SAFC)/1.52
- (SGR)/.18
- (JOE)/.11
- (UARM)/.25
- (VLO)/2.30
- (VNO)/.73

Upcoming Splits
- (ACAP) 3-for-2

Economic Releases
8:30 am EST
- The 3Q Employment Cost Index is estimated to rise .9% versus a .9% gain in 2Q.

10:00 am EST
- Consumer Confidence for October is estimated to rise to 108.0 versus a reading of 104.5 in September.
- The Chicago Purchasing Manager for October is estimated to fall to 58.0 versus a reading of 62.1 in September.

BOTTOM LINE: Asian indices are mostly higher, boosted by automaker and technology shares in the region. I expect US equities to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.

Stocks Finish Mostly High on Falling Energy Prices and Strong Earnings

Indices
S&P 500 1,377.93 +.04%
DJIA 12,086.50 -.03%
NASDAQ 2,363.77 +.56%
Russell 2000 770.36 +.59%
Wilshire 5000 13,795.83 +.08%
S&P Barra Growth 639.06 +.07%
S&P Barra Value 736.78 +.02%
Morgan Stanley Consumer 671.00 +.34%
Morgan Stanley Cyclical 859.63 +.06%
Morgan Stanley Technology 550.01 +.94%
Transports 4,788.29 +.84%
Utilities 447.04 -.10%
Put/Call .81 -21.36%
NYSE Arms 1.24 -17.78%
Volatility(VIX) 11.20 +3.70%
ISE Sentiment 152.00 -5.59%
US Dollar 85.56 unch
CRB 306.22 -1.97%

Futures Spot Prices
Crude Oil 58.42 -3.84%
Unleaded Gasoline 145.10 -6.98%
Natural Gas 7.43 -5.01%
Heating Oil 160.50 -5.28%
Gold 606.20 -.20%
Base Metals 244.27 -1.66%
Copper 335.00 -.25%
10-year US Treasury Yield 4.67% -.09%

Leading Sectors
Disk Drives +3.41%
Airlines +2.27%
Software +1.22%

Lagging Sectors
Energy -1.56%
HMOs -1.73%
Coal -1.80%

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In Play

Afternoon Recommendations
Bank of America:
- Rated (BID) Buy, target $45.

Afternoon/Evening Headlines
Bloomberg:
- Merck(MRK) will buy Sirna Therapeutics for $1.1 billion to gain access to drugs based on the mechanism that regulates the flow of genetic information.
- The American Red Cross, provider of emergency blood supplies and disaster aid, proposed an overhaul that will cut the number of seats on its board and put day-to-day operations clearly in the hands of management.
- KFC Corp., the home of Colonel Sanders’ Kentucky fried chicken, will start using oil without harmful trans fatty acids in the US after a lawsuit claimed its food raises the risk of heart disease.
- US daily newspapers are losing readers at an accelerating rate, led by big-city publications such as the Miami Herald, NY Times, Boston Globe and LA Times.
- Crude oil fell the most in more than a year in NY on forecasts that warm US weather will reduce demand for heating fuels, bolstering inventories.

Fortune:
- Yahoo!(YHOO) is considering buying Time Warner’s(TWX) AOL unit.

Reuters:
- Federal Reserve Bank of Dallas President Richard Fisher said he’s “very comfortable” with the central bank’s interest-rate stance after policy makers voted for a third month to leave borrowing costs unchanged.

BOTTOM LINE: The Portfolio finished higher today on gains in my Semi longs, Biotech longs, Retail longs and Commodity shorts. I did not trade in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was mildly positive today as the advance/decline line finished modestly higher, most sectors rose and volume was about average. Measures of investor anxiety were mixed into the close. Today's overall market action was modestly bullish. Most of today's weakness was contained to the energy, healthcare and telecom sectors. Tech stocks outperformed substantially with the MS Tech Index rising almost 1%. Oil traded down $2.36 and looks poised to test its recent low of $56.55. I continue to believe oil will test $50 before year-end. Copper is also weakening as inventories reach 7-month highs. Long-term interest rates were stable today and look to remain low as the U.S. treasury cuts bond sales 50%. The NYSE Arms continues to trade at above-average levels despite recent gains, which is another positive.

Stocks Mostly Higher into Final Hour on Another Fall in Energy Prices and Strong Earnings

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Semi longs, Retail longs, Biotech longs and Commodity shorts. I covered some of my (IWM) and (QQQQ) hedges, thus leaving the Portfolio 75% net long. The tone of the market is positive as the advance/decline line is modestly higher, most sectors are rising and volume is about average. Back on July 20, three days after the S&P 500 made its final low before tearing higher, I highlighted how large the negativity bubble had become. In my opinion, overall investor sentiment is currently nowhere near levels associated with meaningful market tops. The negativity bubble has lost some air, but shows few signs of popping. I continue to believe the bears' remain stunningly complacent given the recent rally and DJIA record highs. I expect US stocks to trade mixed into the close from current levels as political uncertainty and profit-taking offsets lower energy prices and strong earnings.

Today's Headlines

Bloomberg:
- Crude oil is falling the most in more than three weeks, to below $59/bbl., as warm US weather reduced demand for heating fuels, bolstering inventories.
- Federal Reserve Bank of Richmond President Lacker, coming off his third dissent from a decision to leave interest rates unchanged, said the US economy is “resilient enough” to withstand further credit tightening.
- Schneider Electric SA, the world’s biggest supplier of circuit breakers, agreed to buy American Power Conversion(APCC) for $6.1 billion to become the largest maker of equipment that protects computers and factories from power outages.
- Declines in the cost of shipping dry-bulk commodities such as coal and iron ore, down 6.4% recently, may accelerate as Chinese demand for iron ore slips.
- Copper prices plunged the most in three weeks in London, leading a slump in industrial metals, as rising inventories renewed speculation that mine output may exceed demand this year. Inventories of copper tracked by exchanges in London, NY and Shanghai rose to 190,024 metric tons today, the highest in 7 months. Supplies from mines and scarp yards will top demand by 146,000 tons next year, the first surplus since 2002, Mitsui Bussan Commodities Ltd said Oct. 6.

Wall Street Journal:
- The SEC is looking into whether UBS AG was involved in illegitimate manipulation of Treasury securities prices in February.
- World Bank President Paul Wolfowitz is extending his efforts to reshape Iraq by strengthening the international lending agency’s presence in the Middle Easter nation.
- NY trading firm Cantor Fitzgerald LP is to offer shares of its inter-dealer brokerage business to the public.

NY Times:
- Lehman Brothers(LEH) and IBM(IBM) are starting a $180 million private equity fund to buy minority stakes in Chinese companies.
- Sheik Mohammed bin Rashid al-Maktoum, the ruler of Dubai whose company was spurned from attempting to run operations at six US ports in March, has become a fabled name in US horse racing.
- NYC is considering a plan to require some of the city’s 20,000 restaurants to disclose calories on menus and menu boards.

AFP:
- Lawyers for ousted Iraqi dictator Saddam Hussein returned to court in Baghdad and presented a list of demands for ending their boycott of his genocide trial.

Personal Income Surges, Personal Spending and Inflation Decelerate

- Personal Income for September rose .5% versus estimates of a .3% gain and an upwardly revised .4% increase in August.
- Personal Spending for September rose .1% versus estimates of a .2% increase and an upwardly revised .2% gain in August.
- PCE Core for September rose .2% versus estimates of a .2% increase and an upwardly revised .3% increase in August.

BOTTOM LINE: Personal spending in the US rose last month and Americans’ incomes increased by the most in three months, suggesting the economy ended the third quarter on a strong note, Bloomberg reported. Job growth and falling fuel prices are helping soften the effects of a slowing housing market. Disposable income, the money left over after taxes, rose 5.9% from year ago levels. Taking into account price changes, spending rose .4% in September. Inflation-adjusted spending on durable goods, such as furniture and autos, rose 2.1% versus a 1.5% decline the prior month. The average price of regular unleaded gas fell to $2.53 in Sept. from $2.95/gallon in August. Workers’ average hourly earnings, adjusted for inflation, rose the most since 1998 in September. Rising wages, decelerating inflation, a rising stock market and low interest rates are spurring the recent jump in consumer sentiment. I expect personal spending and income growth to remain healthy over the intermediate-term, while measures of inflation continue to decelerate.

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