Friday Watch

Late-Night Headlines
Bloomberg:
- Countrywide Financial(CFC), the biggest US mortgage lender, said it has “significant” sources of short-term funding after the slump in demand for loans pushed some rivals toward bankruptcy.
- Bond insurers, including Radian Asset Assurance and ACA Capital Holdings, have enough capital to protect their credit ratings against a “highly stressed” scenario for subprime mortgages originated in 2006, Standard & Poor’s credit analysts said in a research report.
- One measure of the US money supply rose by $8.1 billion in the week that ended July 23, according to Federal Reserve statistics released in Washington. That left M2 growing at an annual rate of 6.1% for the past 52 weeks.
- China, which may surpass the US to become the second-largest gold producer this year, mined 15% more of the precious metal in the first half as higher prices prompted companies to boost output.
- The yen headed for a weekly decline versus the US dollar as investors resumed purchase of riskier assets funded by loans in the currency.
- Japanese exporter shares advanced after better-than-forecast earnings in the US lifted indexes there and eased investor concern that the subprime loan problem will derail growth in Japan’s largest export market.
- Toyota Motor’s(TM) plug-in electric car may have less than half the range of a competing vehicle planned by General Motors(GM), people with knowledge of both companies’ development programs said.

Wall Street Journal:
- MRU Holdings(UNCL), also known as MyRichUncle, is using the student-loan industry’s conflict of interest scandal to set itself apart and increase business.

NY Times:
- Ford Motor(F) wants to sell its Jaguar and Land Rover brands by Sept. 30 and its Volvo unit by year’s end.
- Is the Dance Over? Citigroup Is Upbeat.

Reuters:
- Fed’s Kroszner: Broader economy unhurt by subprime.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (EXPE), target raised to $32.
- Downgraded (TLB) to Sell, target $16.
- Reiterated Buy on (CVS), target $43.
- Reiterated Buy on (GME), target $46.
- Reiterated Buy on (ADBL), target $13.

Morgan Stanley:
- UAL Corp.(UAUA), the owner of United Airlines, is a potential takeover target for rival carriers or a private equity firm. The company can earn about $4 billion in free cash flow over the next four years, making it attractive to private equity, citing Credit Suisse analyst Daniel McKenzie. .

Night Trading
Asian Indices are unch. to +1.0% on average.
S&P 500 futures -.16%.
NASDAQ 100 futures -.14%.

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Earnings of Note
Company/EPS Estimate
- (PG)/.66
- (WY)/.39

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- The Change in Non-farm Payrolls for July is estimated at 127K versus 312K in June.
- The Unemployment Rate for July is estimated at 4.5% versus 4.5% in June.
- Average Hourly Earnings for July are estimated to rise by .3% versus a .3% gain in June.

10:00 am EST
- The ISM Non-Manufacturing for July is estimated at 59.0 versus 60.7 in June.

Other Potential Market Movers
- None of note

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

Stocks Finish Near Session Highs on Strong Volume

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Stocks Surging into Final Hour on Bargain-Hunting, Short-Covering, Less Pessimism

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Semi longs, Biotech longs, Computer longs and Energy shorts. I have not traded today, thus leaving the Portfolio 75% net long. The overall tone of the market is mildly positive today as the advance/decline line is slightly higher, most sectors are rising and volume is above average. My intraday gauge of investor angst is at an elevated level again. Other measures of anxiety are near or above the levels seen at the March market lows. We have been hearing for two years that the housing downturn would lead to an imminent economic decline as consumer spending collapses, sending unemployment soaring. I see no evidence of this. The latest consumer confidence report just hit new cycle highs, jobless claims are falling to low levels and retail sales are accelerating. And that is with oil at record highs and housing-related fear stories rampant in the media. I continue to believe the recent credit turmoil will remain a financial event and not an economic one. I see consumer spending actually accelerating to above-average rates this autumn as energy prices fall meaningfully, interest rates remain low, inflation decelerates to low rates, consumer sentiment rises further, stock gains continue, wages continue to substantially outpace inflation, housing fears subside and unemployment remains historically low. 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:
- Prudential Financial(PRU) said it’s still buying securities backed by subprime mortgages and expects turmoil in the market to cost the company no more than $150 million over five years.
- MBIA Inc.(MBI), the world’s largest bond insurer, told investors today that the turmoil in the subprime mortgage market poses “no threat” to the $114 billion of collateralized debt obligations the company has insured.
- US brokers’ shares have fallen to historically low levels due to “panic” selling and should rebound when investors factor in the firms’ earning potential, Keefe, Bruyette & Woods said.
- Barnaby Martin, chief European credit strategist at Merrill Lynch(MER) sees demand for collateralized debt obligations or CDOs picking up by year-end.
- Natural gas futures in NY declined 4% as inventories rose toward a record as industrial demand waned further, easing concern of possible supply disruptions from storms and heat-driven demand.
- Beazer Homes(BZH) shares rallied after hedge fund Citadel Investment Group LLC almost doubled its stake in the homebuilder.

Wall Street Journal:
- A team led by Alliant Techsystems(ATK) may sign a $1.5 billion design-and-development contract for Ares I solid-fuel boosters in the next few days, citing aerospace industry officals.
- VMware’s Fusion program allows Apple’s(AAPL) Macintosh personal computers to run the Apple operating system and Microsoft’s(MSFT) Windows seamlessly, Walter Mossberg wrote.
- Google Inc.(GOOG) has suggested that wireless operators, including T-Mobile USA and Verizon Wireless(VZ), offer handsets designed for Google products such as searches, e-mail and a mobile Web browser.
- Wal-Mart(WMT) has boosted sales and frustrated rivals by promoting well-known consumer electronics brands at lower prices.

NY Post:
- The vacancy rate for lower Manhattan office space has dropped to 6.7%, almost the level it was in the months preceding the Sept. 11, 2001, terrorist attacks, citing a study.

Boston Globe:
- The collapse of Sowood Capital Management LP cost the Massachusetts state pension system $30 million.

Gulf News:
- High inflation in the Persian Gulf will slow real gross domestic product growth, citing a report from the National Bank of Dubai.

Job Market Still Very Healthy, Factory Orders Rise

- Initial Jobless Claims for last week fell to 307K versus estimates of 310K and 303K the prior week.

- Continuing Claims rose to 2525K versus estimates of 2548K and 2541K prior.

- Factory Orders for June rose .6% versus estimates of a 1.0% gain and a -.5% decline in May.

BOTTOM LINE: First-time claims for jobless benefits rose less than forecast last week, indicating the labor market is still expanding, Bloomberg said. The four-week moving average of claims fell to 305,500 from 309,000 the prior week. The unemployment rate among those eligible for benefits, which tracks the US unemployment rate, held steady at a historically low 1.9%. We have been hearing for two years that the housing downturn would lead to an imminent economic decline as consumer spending collapsed, sending unemployment soaring. I see no evidence of this. The latest consumer confidence report just hit new cycle highs, jobless claims are falling to historically low levels and retail sales are accelerating. And that is with oil at record highs and housing-related fear stories rampant in the media. I continue to believe the job market will remain healthy over the intermediate-term without generating substantial unit labor cost increases.

Orders placed with American factories rose in June as international buyers, buoyed by the strongest global expansion since the 1970s, bought more aircraft. Orders for durable goods, which make up over half of total factory demand, surged 1.3% in June versus a 2.4% decline the prior month. Today’s report showed business spending plans were unchanged in June, a revision from a previously reported drop. Bookings for capital goods ex aircraft and military equipment, a gauge of future business investment, were unch. after declining 1.5% in May and up from a previous estimate of a .7% decline. I continue to believe manufacturing will add to economic growth through year-end as companies gain more confidence in the sustainability of the current expansion as consumer spending accelerates and rebuild inventories from depleted levels.

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