Today's Headlines

Bloomberg:
- The $168 billion of subprime-mortgage bonds held by Fannie Mae(FNM) and Freddie Mac(FRE), the two largest US mortgage finance companies, have probably lost $.134 billion of value this year, according to UBS AG analysts. “While no market decline is a positive, we feel a market decline of this magnitude is not at a dangerous or alarming level,” the analyst said.
- Shares of heavily shorted Beazer Homes(BZH) plunged this morning on speculation the homebuilder may file for bankruptcy. Beazer said the rumor was false.
- GM(GM) said US sale fell in July as Ford(F), Toyota Motor, Honda Motor and DaimlerChrysler also posted declines.
- US Treasury Secretary Paulson said he’s confident about the strength of the American economy and suggested it can weather the sell-off in global financial markets.
- Crude oil is falling $1.71/bbl. after the EIA reported gasoline supplies rose again as oil supplies remain near 10-year highs. Gasoline futures also fell 3.5% on the news.

Wall Street Journal:
- Deutsche Lufthansa AG is to link up with a group of companies led by T-Mobile, a Deutsche Telekom AG unit, to offer broadband Internet access and wireless e-mail to passengers on long flights.
- Harvard University lost about $350 million through an investment in Sowood Capital Management LP, a hedge-fund firm founded by one of its own former fund managers.
- Google Inc.(GOOG), Microsoft(MSFT) and other computer-industry companies plan to contest what they say are excessive copyright-violation warnings by content companies, including book publishers and film studios.

Le Monde:
- Saif Al-Islam Qaddafi, a son of Libyan leader Muammar Qaddafi, said that his country and France may sign military contracts and cooperation agreements.

Al-Wasat:
- As many as 85 international oil companies, mostly from the US, have shown an interest in exploring for oil and natural gas in Bahrain.

Pending Home Sales Jump Most Since 2004, Manufacturing Still Healthy

- Pending Home Sales for June rose 5.0% versus estimates of a -.5% decline and a -3.7% decline in May.

- ISM Manufacturing for July fell to 53.8 versus estimates of 55.0 and a reading of 56.0 in June.

- ISM Prices Paid for July fell to 65.0 versus estimates of 67.0 and a reading of 68.0 in June.

BOTTOM LINE: Americans unexpectedly signed more contracts to buy previously owned homes in June, a sign that housing may be stabilizing, Bloomberg said. Economists expect housing to gradually exert less of a drag on the economy going forward. Pending home sales rose 8.6% in the West, 4.7% in the South, 3.5% in the Midwest and 3.1% in the Northeast. The 5.0% gains in Pending Home Sales was the largest since March 2004. I continue to believe home sales are stabilizing at relatively high levels and that housing-related fears are peaking right about now.

Manufacturing in the US expanded in July at close to the fastest pace in more than a year as factories received more orders from overseas, Bloomberg said. The ISM Manufacturing Index is still above long-term average levels. The Prices Paid component of the index fell to 65 from 68 the prior month. The New Orders component fell to 57.5 from 60.3 the prior month. The Inventory component of the index rose to 48.5 from 45.3 the prior month. Manufacturing will likely continue adding to overall US growth over the intermediate-term as companies gain more confidence in the durability of the current expansion and continue to rebuild depleted inventories.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Derivative indexes based on subprime mortgages made last year have fallen too low, with investors estimating more losses than there likely will be, Wachovia Corp.(WB) analyst Glenn Schultz said.
- Major Arab allies of the US cautioned today against a rapid troop withdrawal from Iraq that could shake the region, Defense Secretary Robert Gates and Secretary of State Condoleezza Rice said in Egypt.
- Drivers in California, the most-populous US state, used less gasoline in April than the same month a year earlier as average pump prices rose, a state agency said.
- South Korea’s exports grew at the fastest pace in six months in July amid surging demand for cars, semiconductors and mobile phones.
- Rupert Murdoch’s News Corp.(NWS/A) agreed to buy Dow Jones(DJ) for $60 a share, gaining control of the Wall Street Journal and ending the Bancroft family’s 105 years of stewardship, according to two people with knowledge of the transaction.
- Bear Stearns(BSC), manager of two hedge funds that collapsed last month, halted redemptions from a third fund after a slump in credit markets prompted investors to demand their money back.
- The UN Security Council voted to create a peacekeeping mission in the Darfur region of Sudan in an attempt to end a conflict that has killed at least 200,000 people and provoked worldwide protests.
- Citigroup(C), JPMorgan Chase(JPM) and four more banks won’t back out of an agreement to finance the $32 billion takeover of TXU Corp.(TXU) if they fail to sell debt issued in the deal to investors.
- US Treasury Secretary Henry Paulson said legislation to force China to raise the value of its currency is the “wrong approach” and risks provoking a protectionist reaction from other countries.

Wall Street Journal:
- Marathon Oil(MRO) offered to purchase Western Oil Sands for $5.45 billion, which would give the Houston company a foothold in Canada’s massive heavy-oil deposits and deepen ties between the northern Alberta oil reserves and US refineries.

NY Times:
- The FCC moved cautiously Tuesday toward creating a more open national wireless broadband network, handing a partial victory to Google(GOOG), which was pushing for more competition in cellphone sevices.

Financial Times:
- The world’s biggest oil producers have boosted their search for oil and gas to one of the highest levels in two decades as prices on Tuesday neared record highs of more than $78 a barrel.

Daily Telegraph:
- Dow Chemical Co.(DOW), the largest US chemical maker, is considering bidding for Imperial Chemical Industries Plc.

Late Buy/Sell Recommendations
Citigroup:
- Upgraded (DV) to Buy, target $40.
- The head of natural gas purchasing at a large chemical company supported our observation that industrial demand continues to decline. Recent installation of high efficiency burners is helping his company reduce natural gas consumption. Many opportunities to conserve remain and efforts are ongoing. In one example, the savings can be significant according to a leading supplier, potentially reducing natural gas use by 25-40% with the most advanced burners that use oxygen. Recently, a decline in industrial demand has shaved 1-1.5% off of natural gas consumption in the US versus a year ago. While migration of US manufacturing in the chemical and metals industries has been a significant source of demand destruction in the past, we think that conservation is likely to drive long-term demand destruction.

Night Trading
Asian Indices are -1.50% to -.75% on average.
S&P 500 futures -.77%.
NASDAQ 100 futures -.55%.

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Earnings of Note
Company/EPS Estimate
- (ASF)/.39
- (AGN)/.51
- (AT)/.71
- (APPB)/.31
- (BEC)/.75
- (BYD)/.47
- (CA)/.23
- (CI)/.88
- (CTSH)/.53
- (CSC)/.71
- (DVN)/1.47
- (DLB)/.21
- (D)/.99
- (EDS)/.25
- (ERTS)/-.35
- (GRMN)/.74
- (GIVN)/.09
- (GSF)/1.58
- (IVGN)/.76
- (JNY)/.31
- (KFT)/.47
- (LVS)/.25
- (MSO)/-.09
- (MTZ)/.23
- (MA)/1.31
- (MCO)/.69
- (NBL)/1.19
- (OII)/.71
- (OMX)/.32
- (OC)/.27
- (PH)/1.77
- (PRU)/1.72
- (Q)/.15
- (SOHU)/.18
- (SPW)/1.16
- (SBUX)/.21
- (TK)/.82
- (THQI)/-.26
- (TWX)/.20
- (RIG)/1.72
- (DIS)/.55
- (WCW)/.70

Upcoming Splits
- (SJR) 2-for-1

Economic Releases
10:00 am EST
- Pending Home Sales for June are estimated to fall .5% versus a 3.5% decline in May.
- ISM Manufacturing for July is estimated to fall to 55.3 versus a reading of 56.0 in June.
- ISM Prices Paid for July is estimated to fall to 67.0 versus 68.0 in June.
- Total Vehicle Sales for July is estimated to rise to 16.0M versus 15.6M in June.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil drawdown of -1,125,000 barrels. Gasoline supplies are expected to rise by 125,000 barrels. Distillate inventories are expected to rise by 1,325,000 barrels. Finally, refinery utilization is expected to rise by .3%.

Other Potential Market Movers
- The Bank of England Policy Meeting, Keefe Bruyette & Woods Community Bank Conference, Challenger Job Cuts, ADP Employment Change and weekly MBA Mortgage Applications report could also impact trading today.

BOTTOM LINE: Asian indices are lower, pressured by technology and financial stocks in the region. I expect US equities to open modestly lower and to maintain losses into the afternoon. The Portfolio is 50% net long heading into the day.

Stocks Finish at Session Lows on Credit Fears and Rise in Oil

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Stocks Mildly Lower into Final Hour on Lingering Credit Fears and Rise in Energy Prices

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Computer longs and I-Banking longs. I added (IWM)/(QQQQ) hedges and added to my (EEM) short today, thus leaving the Portfolio 75% net long. The overall tone of the market is neutral today as the advance/decline line is neutral, sector performance is mixed and volume is very heavy. My intraday gauge of investor angst is at an elevated level. LoopRumors.com is reporting that today's rumor that Apple (AAPL) is scaling back production of the iPhone is unfounded. The other rumor floating around that iPod production is being cut is also likely unfounded, according to Piper Jaffray. The Piper analyst also thinks that if an iPod production cut is occurring, it may be a sign of a new version coming, which is a positive. I continue to believe that AAPL will move much higher longer term and view any near-term pullbacks as just another buying opportunity. Heavily shorted Under Armour (UA), one of my longs, is soaring 15% to a new record high on a very positive earnings report. As I have said before, I have never seen more reckless shorting in my life. Numerous stocks with 10%+ of the float short have risen by stunning amounts over the last year. As I have said before, I think the days of throwing short darts at stocks with high P/Es and hitting a bull's-eye with little in the way of downside catalysts are over as the “growth style” continues to significantly outperform the “value style.” Weekly retail sales came in with a 2.8% gain for the second straight week. This is up from a weekly average of 0.1% gains from mid-April through mid-May and up from a 1.4% gain earlier this month. I still expect retail sales to head back above average levels this fall as energy prices fall, stocks rise, the job market remains healthy, inflation decelerates to low levels and housing fears subside. I expect US stocks to trade modestly higher into the close from current levels on bargain-hunting, more economic optimism and short-covering.