Today's Headlines

Bloomberg:
- Fed Chairman Bernanke predicted American economic growth will pick up slightly next year and inflation will gradually recede.
- Emerging-market bonds fell after Bear Stearns(BSC) told investors in its failed hedge funds they will get little if any money back, reviving concern that losses on US subprime mortgage-backed securities may widen.
- Lehman Brothers(LEH) denied speculation that it may face greater potential losses from subprime mortgages than previously disclosed.
- Rio Tinto Group(RTP), the world’s third-largest mining company, said iron-ore production climbed to a record in the second quarter.
- Airports worldwide handled a record 4.4 billion passengers in 2006, up 4.8% from a year earlier, an industry group said.
- North Korea said it will disclose all of its nuclear programs and disable them within six months, South Korean nuclear negotiator Chun Yung Woo said, after he met his North Korean counterpart Kim Kye Gwan in Beijing.

Wall Street Journal:
- The US newspaper industry is facing a major decline in advertising revenue as classified, national and retail sales all recorded a drop during the first quarter, citing the Newspaper Association of America.
- American Airlines(AMR) will focus its marketing on environment concerns from August, citing an interview with David Cush, senior vp of global sales at the AMR Corp. unit.

NY Times:
- Google Inc.(GOOG) plans to announce today the expansion of a program allowing advertisers to purchase newspaper space through its online system.

Salon:
- Elizabeth Edwards said that her husband, Democratic presidential candidate John Edwards, would be a better advocate for women’s issues than rival Hillary Clinton.

Women’s Wear Daily:
- Kohlberg Kravis Roberts plans to offer $24 billion to acquire Macy’s Inc.(M), the second-largest US department-store chain.

Financial Times:
- Microsoft Corp.(MSFT) will have to introduce some truly innovative products to keep Google Inc.(GOOG) and Apple Inc.(AAPL) from gaining more ground on the Redmond, Washington-based software company.
- Coca-Cola(KO), General Mills(GIS) and nine other leading food makers will today announce new voluntary curbs on marketing to children as the industry seeks to head off US regulation or lawsuits over childhood obesity.

Apple Daily:
- Nvidia Corp.(NVDA) may acquire Via Technologies’ chipset division, citing market speculation.

Inflation Below Long-term Average Rates, Housing Starts Rise, Building Permits Fall

- The Consumer Price Index for June rose .2% versus estimates of a .1% gain and a .7% increase in May.

- The CPI ex Food & Energy for June rose .2% versus estimates of a .2% increase and a .1% gain in May.

- Housing Starts for June rose to 1467K versus estimates of 1450K and a downwardly revised 1434K in May.

- Building Permits for June fell to 1406K versus estimates of 1480K and an upwardly revised 1520K in May.

BOTTOM LINE: Consumer prices in the US rose .2% in June, the smallest gain in five months, as gasoline prices retreated, Bloomberg reported. The CPI year-over-year rose 2.7%, below the 20-year average of 3.1%. Core prices are now rising at a 2.3% pace, versus 3% in the first half of last year. Today’s report showed energy prices fell .5% in June as gasoline fell 1.1%. Clothing prices fell .6% versus a .3% decline the prior month. Auto prices were unch. versus a .2% decline the prior month. Moreover, Bernanke said in his speech today that the PCE core, the Fed’s favorite inflation gauge, will rise between 1.75-2.0% next year, below the 20-year average of 2.5%. I continue to believe inflation fears have peaked for this cycle and that measures of inflation will continue to decelerate through year-end as energy and food prices fall meaningfully from current levels.

US builders unexpectedly started work on more homes in June while permits for future construction fell to the lowest level in a decade, Bloomberg reported. The rise in starts was led by a 9% increase in the West and 2.4% gain in the South. Starts fell 3.7% in the Mid-west and 2.4% in the Northeast. I continue to believe the substantial, but diminishing, drag on the US economy from housing is an overall positive for US stocks. I still think home sales are stabilizing at relatively high levels by historic standards, however home construction will likely remain muted at least through year-end as homebuilders continue to work down inventories.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Bear Stearns(BSC) told investors in one of its hedge funds that they won’t get any money back after creditors forced it to sell assets at depressed prices, according to a letter sent by the firm.

NY Times:
- IBM(IBM) Showing That Giants Can Be Nimble.

MarketWatch.com:
- US markets stage technically valid breakout.
- Electronic shopping and shopping for electronics are expected to experience the biggest boosts in back-to-school spending this year, the National Retail Federation said Tuesday.

Reuters:
- Hedge fund firm Black Pearl Asset Management on Tuesday said it will launch portfolios to snatch up cheap subprime mortgage securities battered by the current crisis.

Financial Times:
- China’s air pollution will sicken 20 million people a year with respiratory diseases by 2020, citing estimates from the Organization for Economic Cooperation and Development. An OECD report projects that pollution will also cause 600,000 premature deaths in urban areas and 9 million person-years of work loss due to illness by that date.
- Market insight: Be bullish and watch the bears impale themselves. Headlines herald a US prime-time, subprime mortgage implosion leading to an upcoming credit crunch crisis – destined to sink shares, raise interest rates and impale economies. But this is demonstrable nonsense.

Xinhua News Agency:
- China’s economy showed a “more obvious” trend from fast growth to overheating in the first half of 2007, citing a legislative committee. An “excessive” trade surplus, lending growth and investment expansion were still “prominent” problems in the economy during the first half, the committee said.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (WFC), target $40.
- Reiterated Buy on (TSCO), target $65.50.
- Reiterated Buy on (SBUX), target $40.

Keybanc:
- Rated (WAB), (RAIL) and (GBX) Buy.

Night Trading
Asian Indices are -.50% to +.25% on average.
S&P 500 futures -.56%.
NASDAQ 100 futures -.62%.

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Earnings of Note
Company/EPS Estimate
- (ABT)/.68
- (ADS)/.83
- (ALL)/1.80
- (MO)/1.13
- (DOX)/.51
- (ASD)/1.08
- (BLK)/1.67
- (CTAS)/.54
- (CTXS)/.36
- (CMA)/1.22
- (DAL)/.62
- (DST)/.84
- (EBAY)/.32
- (GCI)/1.20
- (RX)/.39
- (IBM)/1.47
- (JCI)/1.98
- (JPM)/1.09
- (JNPR)/.20
- (LRW)/.35
- (MI)/.85
- (NE)/2.14
- (PFE)/.50
- (PJC)/.74
- (LUV)/.22
- (STJ)/.43
- (TER)/.12
- (UTX)/1.15
- (WM)/.89

Upcoming Splits
- (IOSP) 2-for-1

Economic Releases
8:30 am EST
- The Consumer Price Index for June is estimated to rise .1% versus a .7% gain in May.
- The CPI Ex Food & Energy for June is estimated to rise .2% versus a .1% gain in May.
- Housing Starts for June are estimated to fall to 1450K versus 1474K in May.
- Building Permits for June are estimated to fall to 1480K versus 1520K in May.

10:00 am EST
- Bernanke Report on Economy & Fed Policy.

10:30 am EST
- Bloomberg estimates call for a weekly crude oil drawdown of -500,000 barrels versus a -1,462,000 barrel decline the prior week. Gasoline supplies are expected to rise by 850,000 barrels versus a 1,143,000 barrel build the prior week. Distillate inventories are estimated to rise by 900,000 barrels versus a 760,000 barrel increase the prior week. Finally, Refinery Utilization is expected to rises by .23% versus a .14% increase the prior week.

Other Potential Market Movers
- The weekly Mortgage Applications report, (LRCX) Analyst Meeting, AG Edwards E&P Conference and SEMICON West could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by mining and technology stocks 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.

DJIA Closes at Another Record High, Boosted by Gains in Tech and Financial Shares

Indices
S&P 500 1,549.37 -.01%
DJIA 13,971.55 +.15%
NASDAQ 2,712.29 +.55%
Russell 2000 849.89 +.17%
Wilshire 5000 15,609.43 unch.
Russell 1000 Growth 617.90 +.11%
Russell 1000 Value 879.11 -.14%
Morgan Stanley Consumer 739.16 -.43%
Morgan Stanley Cyclical 1,126.52 +.13%
Morgan Stanley Technology 653.39 +.64%
Transports 5,397.89 +.36%
Utilities 507.01 -.08%
MSCI Emerging Markets 141.37 unch.

Sentiment/Internals
Total Put/Call .93 +12.05%
NYSE Arms .90 +26.82%
Volatility(VIX) 15.59 +2.90%
ISE Sentiment 169.0 -6.63%

Futures Spot Prices
Crude Oil 74.06 -.12%
Reformulated Gasoline 210.10 -1.19%
Natural Gas 6.34 -.56%
Heating Oil 204.0 -.76%
Gold 665.30 -.15%
Base Metals 258.84 255.39 -.73%
Copper 353.65 -.72%

Economy
10-year US Treasury Yield 5.06% +2 basis points
US Dollar 80.54 +.02%
CRB Index 318.59 -.64%

Leading Sectors
Semis +4.15%
Disk Drives +1.55%
Software +1.33%

Lagging Sectors
Alternative Energy -1.04%
Homebuilders -1.25%
Coal -2.47%

Evening Review
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Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- Intel Corp.(INTC), the world’s largest computer-chip maker, said second-quarter earnings rose 44% on its first sales increase in six periods. The stock fell 3.7% in after-hours trading.
- Senate Majority Leader Harry Reid said lawmakers won’t take up legislation this year that would increase taxes on managers of hedge funds, buyout firms and real-estate partnerships, but may consider it in 2008.
- Yahoo!(YHOO) said second-quarter profit fell 2.3% as Google Inc.(GOOG) extended its lead in Internet search queries and new rivals took sales in display advertising. The stock fell 3.5% in extended trading.
- 3Com(COMS) has been approached by Silver Lake and Bain Capital over the last couple of months as a potential acquisition candidate. The stock is rising 3.2% after-hours.
- Gasoline futures fell to their lowest level in almost three months before a US Energy Dept. report tomorrow that may show another increase in US inventories.
- Soybeans plunged to a two-week low in Chicago, heading for the biggest two-day drop in two years, as rains in the Midwest improved prospects for the US crop.

BOTTOM LINE: The Portfolio finished slightly higher today on gains in my Semi longs, Retail longs, Medical longs and Energy-related shorts. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was mildly positive today as the advance/decline line finished slightly higher, sector performance was mixed and volume was above average. Measures of investor anxiety were above average into the close. Today's overall market action was mildly bullish. The major flaw in the bear case has been housing's overall impact on U.S. stocks. If it were not for housing's still substantial, but diminishing, drag on the U.S. economy, we would likely be facing multiple Fed rate hikes and rising prospects for a hard landing. Instead, U.S. growth is poised to rise around trend levels through year-end, after a weak first quarter, with diminishing inflation concerns and falling prospects for a hard landing. Tech and financial stocks were especially strong today. Numerous semi equipment stocks soared. This is a significant move as cyclical tech is gaining upside traction to join growth tech in substantial market outperformance. The MS Tech Index is now up 15.5% for the year and poised to move much higher over the intermediate term. Until now, the individual has almost completely shunned U.S. stocks. Today's TIC flow data showed a substantial increase in interest from foreign investors for U.S. stocks. As I have said many times before, keeping all investors, especially the US public, excessively pessimistic on U.S. stocks has been one of the bears' main weapons. I continue to believe that the “herd” will eventually turn more optimistic on U.S. stocks which will result in another substantial move higher in the major averages as rising demand and shrinking supply makes for a lethally bullish combination.

DJIA Hits Another All-time High, Surpassing 14,000 on Economic Optimism, Short-Covering, Lower Commodity Prices

BOTTOM LINE: The Portfolio is higher into the final hour on gains in Retail longs, Medical longs, Semi longs and Energy-related shorts. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is positive today as the advance/decline line is higher, most sectors are rising and volume is above average. Corn is falling another 3.4% today and has plunged 26% from its February 26 all-time euphoric high. The record high occurred five days after I warned that the investment frenzy over the commodity may be nearing a crescendo. The Goldman Sachs Agricultural Commodity Index continues to trade poorly, as well, having peaked in June. I suspect fears over food price inflation are also peaking. Eggs, fresh fruit and meat prices all declined in today's PPI release. It is also interesting to note that corn bulls have insisted for a couple of years that supply can't keep up with rising demand, due to ethanol, yet the commodity is in a freefall. I don't think the fundamentals have changed that much. I just think that the record long speculation by investment funds is reversing. The exact same situation has developed in the oil futures market, and almost nobody is acknowledging it. Large speculators are the most net long oil futures in U.S. history, while commercial hedgers -- including some of the very energy companies that oil bulls love -- are the most net short in history. This exact same situation occurred in corn before its imminent top. I suspect this huge red flag, which is currently being ignored, will be viewed as such before year-end. I continue to believe a major double-top in oil is in the process of forming and still plan to meaningfully increase my energy-related short exposure over the next six weeks. I expect US stocks to trade mixed-to-higher into the close from current levels on more economic optimism, buyout speculation, short-covering, investment manager performance anxiety and lower commodity prices.