Thursday Watch

Late-Night Headlines
Bloomberg:
- A bridge in Minneapolis collapsed today, causing vehicles to fall into the Mississippi River. At least three people were killed.
- China is failing to ease restrictions of human rights activists and is intensifying its crackdown on the media a year before the Beijing Olympics, Human Rights Watch said.
- Mattel’s(MAT) Fisher-Price division is recalling 967,000 Sesame Street, Dora the Explorer and other children’s toys manufactured in China that may contain paint with “excessive levels” of lead.
- Toyota Motor and Honda Motor led Asian carmakers to a record share of US auto sales in July sending their US rivals below the 50% threshold for the first time.
- BMW AG, the world’s largest luxury-car maker, gained US sales in July on young buyers’ demand for the 3-Series sport sedan while other European brands suffered declines.
- Turmoil in global financial markets, while posing a risk to economic growth, isn’t “unsettling,” said John Lipsky, first deputy managing director of the International Monetary Fund.
- Families who lost relatives at the World Trade Center applied for a permit to gather at the site for the anniversary of the Sept. 11 terrorist attack, opposing city and state officials who have moved the ceremony to a nearby lower Manhattan park.
- Shares of Macquarie Bank Ltd. and Babcock & Brown Ltd., Australia’s biggest investment banks, rebounded from yesterday’s slump after the companies said earnings were unaffected by the rout in global credit markets.

Wall Street Journal:
- News Corp.(NWS/A) Chairman Rupert Murdoch, having finalized a deal to buy The Wall Street Journal’s publisher, Dow Jones(DJ), is expected to turn his attention to figuring out his strategy for each of its businesses.

MarketWatch.com:
- Concern about American International Group’s exposure to subprime mortgages is overdone, analysts said on Wednesday.
- Highland Capital Management LP has generated strong performance this year betting against subprime mortgages and is well positioned to benefit from recent turmoil in credit markets, according to a letter the $40 billion investment firm sent to clients on Wednesday.

CNN.com:
- Why stocks can shake off mortgage meltdown. Turmoil in the credit markets is sparking a global sell off, but are investors overreacting?

Financial Times:
- Walt Disney made its first acquisition in social networking on Wednesday, buying Club Penguin, which operates an online virtual world for children, for a fee that could eventually rise to $700m.
- Rupert Murdoch is likely to take control of Dow Jones(DJ) within three months, staff learnt on Wednesday, as the News Corp.(NWS/A) chairman moved to lock in the support of other shareholders after winning the backing of enough members of the Bancroft family.

London-based Times:
- UK manufacturing activity increased in July despite a strong pound, soaring oil prices and higher interest rates, citing the CIPS/NTC purchasing managers’ index.

Nikkei:
- Japan’s Cabinet Office will revise the government’s projections for both real and nominal gross domestic product growth for fiscal 2007 to 2.1%. That would represent a .1 percentage point increase in real growth.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (SPW), target $105.
- Reiterated Sell on (Q), target $7.
- Reiterated Buy on (CBI), target $50.

Night Trading
Asian Indices are unch. to +1.50% on average.
S&P 500 futures +.07%.
NASDAQ 100 futures +.01%.

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Earnings of Note
Company/EPS Estimate
- (ATVI)/.06
- (ATK)/1.36
- (AMT)/.05
- (B)/.48
- (BCO)/.58
- (CKP)/.26
- (CHK)/.65
- (CQB)/.49
- (CLX)/1.10
- (CVS)/.46
- (EK)/.09
- (EXPE)/.33
- (FAF)/.93
- (GMCR)/.14
- (IN)/.06
- (IP)/.54
- (KBR)/.29
- (LEA)/.91
- (MGM)/.58
- (NEM)/.22
- (NYX)/.63
- (PWR)/.17
- (RDC)/1.04
- (HOT)/.63
- (TBL)/-.31
- (VSE)/.14
- (VIA/B)/.49
- (WMB)/.36

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Initial Jobless Claims for last week are estimated to rise to 310K versus 301K the prior week.
- Continuing Claims are estimated to rise to 2548K versus 2545K prior.

10:00 am EST
- Factory Orders for June are estimated to rise 1.0% versus a -.5% decline in May.

Other Potential Market Movers
- The ECB Policy Meeting, weekly EIA natural gas inventory report, CIBC Communications Tech Conference and ThinkEquity ThinkBIG Conference could also impact trading today.

BOTTOM LINE: Asian indices are higher, boosted by mining and financial stocks in the region. I expect US equities to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 75% net long heading into the day.

Stocks Soar into Close on Short-covering, More Economic Optimism, Bargain-hunting

Indices
S&P 500 1,465.81 +.72%
DJIA 13,362.37 +1.14%
NASDAQ 2,553.87 +.30%
Russell 2000 777.91 +.23%
Wilshire 5000 14,713.02 +.54%
Russell 1000 Growth 589.16 +.60%
Russell 1000 Value 822.70 +.61%
Morgan Stanley Consumer 708.80 +1.14%
Morgan Stanley Cyclical 1,041.67 -.19%
Morgan Stanley Technology 630.27 +.78%
Transports 5,045.97 +.32%
Utilities 489.46 +2.11%
MSCI Emerging Markets 132.42 -2.11%

Sentiment/Internals
Total Put/Call 1.36 +14.29%
NYSE Arms .66 -73.26%
Volatility(VIX) 23.67 +.64%
ISE Sentiment 101.0 -3.81%

Futures Spot Prices
Crude Oil 76.65 -1.99%
Reformulated Gasoline 203.30 -3.46%
Natural Gas 6.40 +3.38%
Heating Oil 207.10 -2.46%
Gold 677.50 -.26%
Base Metals 254.80 -2.05%
Copper 358.40 -1.77%

Economy
10-year US Treasury Yield 4.78% +4 basis points
US Dollar 80.83 +.08%
CRB Index 319.87 -1.31%

Leading Sectors
Disk Drives +2.37%
Utilities +2.11%
Telecom +1.77%

Lagging Sectors
Oil Service -1.35%
I-Banks -1.59%
Gold -1.96%

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In Play

Afternoon Recommendations
Bank of America:
- Rated (DELL) Buy, target $35.
- Rated (SUNW) Buy, target $6.25.
- Rated (HPQ) Buy, target $56.

Afternoon/Evening Headlines
Bloomberg:
- Starbucks Corp.(SBUX), the world’s largest coffee shops, said third-quarter profit rose 8.8% on sales from new stores and demand for chilled drinks. The stock surged 4.1% in after-hours trading.
- Dolby Labs(DLB) reported total revenue of $119.6 million, compared to $93.7 million for the third quarter of fiscal 2006, an increase of 28%. The stock is rising 9% in extended trading.
- Invitrogen(IVGN) reported revenues for the second quarter were $322 million, an increase of 13% over the $285 million for 2006. The stock rose 7.6% in after-hours trading.
- The Gordon and Betty Moore Foundation, established by the co-founder of Intel Corp.(INTC) and his wife, pledged $100 million to the Univ. of Cal., Davis for a professional nursing school.
- The International Monetary Fund said the US economy is likely to have a “soft landing” as growth continues in the face of the subprime mortgage concerns.
- Gasoline futures in NY fell 3.3%, the lowest in almost four months, after an energy dept. report today showed a second week of inventory gains as oil inventories remain near decade highs.
- Ethanol prices fell 5.1% in Chicago after a government report showed production increased 38% over the year before and gasoline futures fell.

BOTTOM LINE: The Portfolio finished higher today on gains in my Retail longs, Computer longs, Networking 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 negative today as the advance/decline line finished modestly lower, sector performance was mixed and volume was heavy. Measures of investor anxiety were elevated into the close. Today's overall market action was bullish. The explosive move higher on the close likely left many traders heavily leaning the wrong way. As well, with Asian stocks taking 3%+ hits overnight, I suspect those traders will be quite shocked to come in to their offices and see the DJIA up 150, given the news today. I think the main tell for the close today -- and possibly an indication that we may have seen a meaningful bottom -- came when Beazer Homes (BZH) dropped 42%, yet the broad market held relatively firm. I suspect Asian stocks will see a nice bounce tonight, which should lead to further upside in US and European shares tomorrow morning. Growth stocks are still the cheapest in at least 30 years relative to value stocks on a price-to-cash flow basis. Leading growth stocks have crushed the performance of the major averages this year, have held up better during this pullback and should continue outperforming substantially going forward. Six of the stocks on which I have disclosed that I am long for the last two years -- Google (GOOG, +11.2%), Apple (AAPL, +57%), Intuitive Surgical (ISRG, +120%), Under Armour (UA, +27%), Quanta Services (PWR, +40%) and Gilead Sciences (GILD, +14%) -- are prime examples of this massive outperformance year-to-date, and these are just a few examples. There are many others. Moreover, the Russell 1000 Growth Index is still 7.1% higher year-to-date vs. a 1.9% gain for the Russell 1000 Value Index. Midcap growth is 8.6% higher for the year vs. a 3.1% gain for midcap value. Finally, the Russell 2000 Growth Index is 4.0% higher year-to-date vs. a 4.8% loss for the Russell 2000 Value Index. A significant change is under way toward multiyear growth stock outperformance, in my opinion, and this continues to be ignored by most investors.

Stocks Lower into Final Hour on Overseas Weakness, Credit Fears

BOTTOM LINE: The Portfolio is about even into the final hour as losses in my Medical longs and Biotech longs are being offset by gains in my Retail longs, Computer longs, Commodity shorts and Emerging Market shorts. I covered some of my (IWM)/(QQQQ) hedges and took some profits in my (EEM) short today, thus leaving the Portfolio 75% net long. The overall tone of the market is very negative today as the advance/decline line is substantially lower, sector performance is mostly negative and volume is very heavy. My intraday gauge of investor angst is at an elevated level. It is important to keep perspective in times like this. As the permabears continue to mock the bulls and dismiss their methodologies, the S&P 500 is still about 95% higher over the last five years and has only experienced a 6% pullback, which doesn't even qualify as a correction. The mentality that somehow the fearleaders have been proven right after predicting a recession and stock collapse literally dozens of times over the last five years is further evidence of their extreme complacency, in my opinion. I continue to see little evidence in leading indicators I follow of the current financial event turning into an economic event of consequence. It is important to remember that every pullback since the 2002 lows was a function of investors pricing in the worst case scenario rather than the most realistic scenario, which is symptomatic of the current U.S. negativity bubble. Recent market action is just further evidence of the irrational pessimism that has engulfed U.S. stocks since the major bear market lows five years ago, in my opinion. Oil is falling $1.75 barrel, reversing sharply from morning highs. I think many macro funds have been "hiding" in oil as evidenced by the fact that large crude oil speculators have never been more net long oil futures in history. It appears as though speculators are using the potential double-top in oil as a cue to sell. Apple (AAPL) has rebounded almost 6 points from morning lows around the 50-day moving-average. I suspect today's lows marked another bottom in the shares. I still think $180 is likely before year-end. I expect US stocks to trade modestly higher into the close from current levels on bargain-hunting, more economic optimism and short-covering.

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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