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Wednesday Watch

Late-Night Headlines
Bloomberg:
- While the sub-prime turmoil has caused some investors to reassess credit risk, other are ready to acquire assets at lower prices, given the “ample liquidity” available, Moody’s said. The Moody’s report is titled “Summer 2007: Another False Alarm in Terms of Banking Systemic Risk but a Reality Check,” and was prepared by a team of analysts led by Pierre Cailleteau, the NY-based firm’s chief international economic analyst.
- Federal Reserve Bank of St. Louis President William Poole said problems in the subprime-lending industry haven’t spread through the US economy. Poole also said he sees signs that inflation is “moderating just a bit” and suggested the central bank can afford to wait before lowering interest rates.
- For Baidu.com Inc.(BIDU), the Google Inc.(GOOG) imitator with a 58 percent share of the Chinese Web-search market and a $5.9 billion market value to prove it, the battle for dominance is just beginning. At stake is the Internet market in China, the world's second-biggest after the U.S. by users. Google is gaining ground, if rising short interest on Baidu is any indication.
- The Univ. of Colorado Board of Regents voted to fire a tenured professor criticized for his comments after the Sept. 11 terrorist attacks, citing academic misconduct. The nine-member board voted 8-1 to terminate Ward Churchill, an ethnic studies professor at the university’s Boulder campus.
- Popular support for Osama bin Laden and for suicide bomb attacks against civilians is falling across most of the Muslim world, according to a US survey.
- China’s top planning agency said prevention of “overheating” is the most important policy goal in the second half of 2007, reiterating a government priority to prevent escalating prices and curb inflation.
- Imports of crude oil by Japan, the world’s largest consumer of oil after the US and China, fell .9% in June from a year earlier.

Wall Street Journal:
- The US Justice Dept. has contacted 11 oil-industry companies as part of an investigation into possibly illegal payments to customs agents for freight forwarding and other services.

AP:
- A hearing in the lawsuit aimed at shutting down Facebook.com is scheduled for tomorrow in US District Court in Boston.

Reuters:
- The US Commodity Futures Trading Commission said late on Tuesday that it will hold a telephone conference call with reporters on Wednesday morning to provide details on a significant enforcement case it will file related to illegal trading activity. CFTC Acting Chairman Walter Lukken testified at a congressional hearing two weeks ago that the agency was investigating instances of possible manipulation in US energy markets. He said the CFTC had “evidence of manipulation” by about 100 individuals and entities, but the agency was still trying to build those cases.

Financial Times:
- Apollo Management LP, the NY buyout firm run by Leon Black, is proposing to raise as much as $1.1 billion in a private placement of stock.
- An “unprecedented” joint crackdown on software piracy by Chinese police and the US FBI has led to 25 arrests and the seizure of counterfeit software worth $500M, the FBI said on Tuesday.
- SAC Capital, the $14B hedge fund run by billionaire Steven Cohen, is considering selling up to 20% of itself to private minority investors.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (MCD), target $56.
- Reiterated Buy on (T), target $45.
- Raised (BER) to Buy, target raised to $35.
- Reiterated Buy on (NTRI), target $90.

Night Trading
Asian Indices are -1.0% to -.23% on average.
S&P 500 futures +.07%.
NASDAQ 100 futures +.14%.

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Earnings of Note
Company/EPS Estimate
- (ADVS)/.14
- (AKAM)/.30
- (ATI)/1.94
- (BUD)/.86
- (AAPL)/.72
- (BIDU)/3.48
- (BA)/1.16
- (CPS)/.45
- (CL)/.83
- (COP)/2.68
- (GLW)/.32
- (ETFC)/.40
- (ETH)/.65
- (ESRX)/.54
- (FFIV)/.63
- (FCX)/2.74
- (GD)/1.17
- (GENZ)/.81
- (HES)/1.47
- (LRCX)/1.17
- (LPX)/-.31
- (LSI)/-.02
- (MDC)/-.45
- (WFR)/.75
- (MTH)/-1.38
- (NSC)/.94
- (OI)/.50
- (PMTC)/.20
- (PFCB)/.36
- (PHM)/-.10
- (QCOM)/.52
- (R)/1.07
- (RYL)/.59
- (SY)/.34
- (SYMC)/.20
- (TEX)/1.61
- (TBL)/-.31
- (WLP)/1.36
- (ZMH)/.98

Upcoming Splits
- (DIOD) 3-for-2
- (GMCR) 3-for-1

Economic Releases
10:00 am EST
- Existing Home Sales for June are estimated to fall to 5.86M versus 5.99M in May.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil drawdown of -1,375,000 barrels versus a -449,000 barrel decline the prior week. Gasoline supplies are expected to fall by -125,000 barrels versus a -2,235,000 barrel decline the prior week. Distillate inventories are expected to rise by 750,000 barrels versus a -145,000 barrel decline the prior week. Finally, Refinery Utilization is expected to rise by .6% versus a .87% increase the prior week.

2:00 pm EST
- The Fed’s Beige Book report

Other Potential Market Movers
- The Fed’s Poole speaking, Fed’s Geithner speaking, Morgan Keegan Insurance Conference and weekly MBA Mortgage Applications report could also impact trading today.

BOTTOM LINE: Asian indices are lower, weighed down by commodity and automaker stocks 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 Near Session Lows on Lingering Housing-related Concerns, Profit-taking

Indices
S&P 500 1,511.04 -1.98%
DJIA 13,716.95 -1.62%
NASDAQ 2,639.86 -1.89%
Russell 2000 811.86 -2.84%
Wilshire 5000 15,198.09 -2.04%
Russell 1000 Growth 606.64 -1.75%
Russell 1000 Value 850.80 -2.26%
Morgan Stanley Consumer 726.66 -1.40%
Morgan Stanley Cyclical 1,088.48 -1.97%
Morgan Stanley Technology 642.41 -1.85%
Transports 5,265.10 -1.90%
Utilities 496.84 -3.45%
MSCI Emerging Markets 140.88 -1.76%

Sentiment/Internals
Total Put/Call 1.42 +79.75%
NYSE Arms 1.58 +118.28%
Volatility(VIX) 18.55 +10.35%
ISE Sentiment 112.0 -34.50%

Futures Spot Prices
Crude Oil 73.42 -1.96%
Reformulated Gasoline 204.0 -3.05%
Natural Gas 5.86 -2.95%
Heating Oil 202.90 -1.32%
Gold 682.30 +.12%
Base Metals 266.03 -1.0%
Copper 360.40 -1.44%

Economy
10-year US Treasury Yield 4.91% -3 basis points
US Dollar 80.11 -.31%
CRB Index 317.89 -.38%

Leading Sectors
Airlines +.31%
HMOs +.10%
Hospitals -.33%

Lagging Sectors
I-Banks -3.71%
Homebuilders -3.96%
Coal -5.6%

Evening Review
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In Play

Afternoon Recommendations
Citigroup:
- Upgraded (CHKP) to Buy, target $31.

Afternoon/Evening Headlines
Bloomberg:
- Emerging-market bonds tumbled, pushing yields over US Treasuries to the widest since December, as concern that losses in the US subprime mortgage market may spread prompted investors to sell riskier assets.
- Crude oil fell more than $1 a barrel, the biggest decline in almost a month, on speculation US refineries are increasing their fuel production and a signal that OPEC might be willing to pump more.
- Gasoline futures fell to the lowest in almost four months on speculation a government report tomorrow will show that US supplies are adequate to meet demand in the last weeks of the summer driving season.
- Amazon.com(AMZN), the world’s biggest online retailer, said profit more than tripled after it reduced technology spending and boosted sales of electronics. The company also increased its sales forecast, causing the shares to soar 17% in after-hours trading.
- Linear Technology(LLTC), whose chips are used by Cisco Systems(CSCO) and Apple Inc.(AAPL), said fourth-quarter profit fell 17% as sale jumped. The stock surged 5% in extended trading.

Wall Street Journal:
- Brian Hunter, whose bad energy bets led to hedge fund Amaranth Advisors’ fall, is trying to block a possible enforcement action from the Federal Energy Regulatory Commission.

BOTTOM LINE: The Portfolio finished lower today on losses in my Computer longs, I-Banking longs and Software longs. I added an (XLE) short, added to my (EEM) short and added (IWM/QQQQ) hedges in the final hour, thus leaving the Portfolio 75% net long. The tone of the market was very negative today as the advance/decline line finished substantially lower, almost every sector declined and volume was above average. Measures of investor anxiety were above average into the close. Today's overall market action was very bearish. Commodity and housing-related equities were especially weak today. There is definitely an air of panic around those sectors. While we are likely not at the absolute bottom in those stocks, I sense we are nearing one. The 10-year yield finished at session lows, down 3 basis points, to 4.92%. While the major averages were very ugly, an unusual number of stocks I monitor were higher or just posted slight losses. "Growth" stocks are now substantially outperforming "value" stocks year-to-date. Here is a summary:

Large-cap growth +10.3%
Large-cap value +5.4%

Midcap growth +12.6%
Midcap value +7.2%

Small-cap growth +8.1%
Small-cap value -.4%

One of my predictions at the beginning of the year was that growth stocks would outperform value stocks and their outperformance would gain steam throughout the year. This appears to be happening now. One of my longs, American Superconductor (AMSC) had a very good day, and I still see substantial upside in the shares from current levels. It was also good to see my largest long, Google (GOOG) gain on the day, especially considering recent commentary on the shares. As well, Broadcom (BRCM) hung tough, and Gilead Sciences (GILD) finished with minor losses. All present longer-term investors great entry points, in my opinion. As I wrote a few weeks ago, I believe oil is in the process of making a major double-top and will begin a substantial decline this quarter that will have major positive implications for the U.S. broad market. I have begun adding to my energy-related shorts and plan to add meaningfully to them over the next month into any hurricane-related spike in the price of oil. The gasoline crack spread plunged another 8.2% today and has collapsed almost 70% in a little over two months. Natural gas is also dropping below $6 for the first time since December of last year and is down 63% from its highs. Finally, reformulated gasoline futures have declined 16% in less than three months.

Stocks Sharply Lower into Final Hour on Lingering Housing-related Worries

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Computer longs, I-Banking longs and Software longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is very negative today as the advance/decline line is substantially lower, most sectors are falling and volume is above-average. My intraday gauge of investor angst is above average levels. Apple (AAPL) shares are under pressure today on reports of slowing demand for the iPhone. I believe any weakness in the shares will prove short term in nature and plan to add to my long on any meaningful decline from current levels. Apple remains my second-largest long position, behind Google (GOOG). I think worries over the credit market "seizing up" are overdone. The Johnson Redbook weekly retail sales rose 2.8% this week vs. a 2.7% gain the prior week. This is up from a 0.1% average gain from mid-April to mid-May. It is also up from a 1.4% gain the first week of this month, and it is the highest level since the 4.2% gain seen in the first week of April, which was the high for the last 52 weeks. Weekly retail sales are now just marginally below long-term average rates. I continue to believe retail sales will move back to above-average levels this fall as energy prices fall substantially from current levels, stocks rise further, housing fears subside, interest rates remain historically low, inflation decelerates further, wages continue to substantially outpace inflation, unemployment remains historically low and consumer confidence improves meaningfully. I expect US stocks to trade modestly higher into the close from current levels on bargain-hunting, short-covering and lower energy prices.

Today's Headlines

Bloomberg:
- Volatility on options for interest-rate swaps may decline as concern eases that losses in subprime mortgage loans and other risky debt will spread, according to RBS Greenwich Capital.
- US company bond risk fell from a two-year high today, according to credit-default swap traders who bet on corporate creditworthiness.
- Morgan Stanley(MS) says investors should reduce bets on European credit quality deteriorating because prices of credit-default swaps overstate the risk of companies missing debt payments.
- Crude oil fell for a third day on speculation that US refineries are increasing output and that OPEC might pump more.
- Eli Lilly(LLY) won the backing of a US panel to sell its osteoporosis medicine Evista for the prevention of breast caner in women after menopause.
- The US and Iranian ambassadors to Iraq agreed to establish a forum on security challenges in the war-torn country, including the threat posed by al-Qaeda.

Wall Street Journal:
- Nokia Oyj(NOK) will say today that it has purchased Twango Inc., an online photo- and video-sharing start-up, as the Espoo, Finland-based company seeks to move beyond mobile phones and into Web-related services.
- Lockheed Martin(LMT) is finding it hard to meet its production schedule for the new “Marine One” helicopter designed to carry US presidents.
- Foreign governments are increasing their investments in US and European companies, prompting concern over a political backlash and rise in prices for speculative assets.

Dow Jones:
- TPG Inc., a private-equity company, has made a bid to buy Ford Motor’s(F) Jaguar and Land Rover units.

NY Post:
- Time Warner’s(TWX) AOL unit plans to acquire the “behavioral targeting” advertising firm Tacoda for $200 million to $300 million.

AP:
- New Haven, Connecticut, today will become the first US city to issue identification cards to illegal immigrants.

CNBC-TV18:
- India’s Wipro Ltd. may pay as much as $550 million to buy a US company.

Sueddeutsche Zeitung:
- German intelligence authorities are bracing for possible terrorist attacks by members of the al-Qaeda network, citing senior security officials.

Islamic Republic News Agency:
- The Iranian Oil Ministry said OPEC will increase production if required. “If the oil market needs it, OPEC will inject more oil into it,” said Javad Yarjani, head of OPEC affairs at the country’s oil ministry.

Links of Interest

Market Snapshot Commentary
Market Performance Summary
Style Performance
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WSJ Data Center
Top 20 Biz Stories
IBD Breaking News
Movers & Shakers
Upgrades/Downgrades
In Play
NYSE Unusual Volume
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