Thursday Watch

Late-Night Headlines
Bloomberg:
- Goldman Sachs Group(GS) blamed its $3 billion in hedge-fund losses this month on too many quantitative managers making the same trades and said it needed to develop new investing strategies.
- China’s spending on factories, equipment and property rose 26.6% in the first seven months of 2007 from a year earlier, maintaining pressure for an interest-rate increase to cool the economy.
- Hong Kong’s stocks are falling 3.6%, pushing the Hang Seng Index to its steepest two-day loss in six years.
- Crude oil is falling $.48/bbl. in NY as forecasters altered the likely track of a storm approaching the Gulf of Mexico.
- Venezuelan President Hugo Chavez will unveil a plan today to rewrite the constitution to allow him to seek indefinite re-election and to deepen the transformation of the country’s political structure.
- HFA Holdings Ltd, an Australian hedge fund manager than manages more than $3 billion, said its funds have benefited from the turmoil in the US subprime mortgage market.

NY Times:
- US-Made Toys Benefit From China’s Troubles.
- China Plans Greater Scrutiny of Food Exports.

CNBC:
- Warren Buffett, chairman of Berkshire Hathaway(BRK/A), said some stocks could be cheaper and worth buying as US markets are dragged down by bad bets on subprime mortgages.

Financial Times:
- A unit of Kohlberg Kravis Roberts, the powerful US private equity group, became the latest victim of the mortgage crisis on Wednesday, casting a cloud over its plans to raise $1.25 billion in an IPO.
- Asian stocks slumped on Thursday, pushing Japan’s Nikkei to 8-month lows, while the yen held firm, as appetite for risky assets waned amid persistent fears about a global credit crisis.

Reuters:
- Investigators from major US stock exchanges and the SEC have formed an elite unit to investigate suspicious trades and tackle insider trading.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (DE), target $149.
- Upgraded (SOV) to Buy, target $22.

CSFB:
- Raised (INTC) to Buy, target $35.

Night Trading
Asian Indices are -5.5% to -2.25% on average.
S&P 500 futures -.91%.
NASDAQ 100 futures -.87%

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Earnings of Note
Company/EPS Estimate
- (ADSK)/.43
- (BEAS)/.13
- (RDEN)/.19
- (EL)/.50
- (FLO)/.24
- (GBE)/.12
- (HPQ)/.66
- (JCP)/.78
- (KSS)/.82
- (JWN)/.69
- (RRGB)/.43
- (RGLD)/.19

Upcoming Splits
- (SHEN) 3-for-1

Economic Releases
8:30 am EST
- Housing Starts for July are estimated to fall to 1400K versus 1467K in June.
- Building Permits for July are estimated to fall to 1400K versus 1413K in June.
- Initial Jobless Claims for last week are estimated to fall to 315K versus 316K prior.
- Continuing Claims are estimated to fall to 2550K versus 2559K prior.

12:00 pm EST
- The Philly Fed for August is estimated to fall to 8.6 versus 9.2 in July.

Other Potential Market Movers
- The weekly EIA natural gas inventory report, (IVGN) Investor Day, (GNW) meeting with investors and CSFB Communications Conference could also impact trading today.

BOTTOM LINE: Asian indices are sharply lower, weighed down by financial and commodity stocks in the region. I expect US equities to open lower and to rally into the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the day.

Stocks Finish at Session Lows on Credit Fears, Technical Selling

Indices
S&P 500 1,406.70 -1.39%
DJIA 12,861.47 -1.29%
NASDAQ 2,458.83 -1.61%
Russell 2000 751.54 -1.49%
Wilshire 5000 14,109.85 -1.48%
Russell 1000 Growth 565.49 -1.67%
Russell 1000 Value 787.02 -1.34%
Morgan Stanley Consumer 696.81 -1.03%
Morgan Stanley Cyclical 973.05 -2.45%
Morgan Stanley Technology 602.15 -1.85%
Transports 4,692.32 -3.26%
Utilities 475.63 -1.40%
MSCI Emerging Markets 122.74 -3.41%

Sentiment/Internals
Total Put/Call 1.39 +1.46%
NYSE Arms 1.30 -31.78%
Volatility(VIX) 30.67 +10.80%
ISE Sentiment 79.0 -21.78%

Futures Spot Prices
Crude Oil 73.26 +1.22%
Reformulated Gasoline 201.0 +1.83%
Natural Gas 6.86 -1.15%
Heating Oil 202.55 +2.17%
Gold 679.0 -.12%
Base Metals 234.20 -3.81%
Copper 330.05 -1.76%

Economy
10-year US Treasury Yield 4.71% -1 basis points
US Dollar 81.85 +.43%
CRB Index 311.88 +.20%

Leading Sectors
HMOs -.26%
Computer Hardware -.67%
Banks -.85%

Lagging Sectors
Homebuilders -4.5%
Steel -5.23%
Gold -5.50%

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Afternoon Recommendations
Bank of America:
- Rated (TWC) Buy, target $43.
- Rated (CMCSA) Buy, target $32.

CSFB:
- Upgraded (INTC) to Outperform.

Afternoon/Evening Headlines
Bloomberg:
- Bruce Bent, who manages about $65 billion in assets as chairman of Reserve Funds, says credit market woes are “blown out of proportion,” but that the crisis will continue “until sanity prevails.”
- Copper fell to a seven-week low in NY on speculation global economic growth may slow, reducing demand for the metal used in wires and pipes.
- Nestle SA, Sara Lee(SLE) and HJ Heinz(HNZ) reported profit that exceeded analysts’ estimates as they increased sales of healthier foods and raised prices.
- US three-month bill yields feel the most since October 1989 as investors sought out the safety of government debt amid a flight from risky assets.
- Network Appliance(NTAP) forecast fiscal second-quarter sales that beat analysts’ estimates. The stock surged 7% in after-hours trading.
- Billionaire Paul Allen may try to buy or recapitalize Charter Communications(CHTR), the company he controls.
- Ralph Acampora, the 40-year Wall Street veteran who helped pioneer the use of past price movements to make stock market predictions, is hanging up his charts.

BOTTOM LINE: The Portfolio finished lower today on losses in my Computer longs, Semi longs and Internet longs. I did not trade in the final hour, thus leaving the Portfolio 50% net long. The tone of the market was very negative today as the advance/decline line finished substantially lower, almost every sector fell and volume was above average. Measures of investor anxiety were very elevated into the close. Today's overall market action was bearish. The averages have convincingly taken out their recent lows, however, the longer-term uptrend since 2002 remains well in tact. A durable bottom isn't likely until the financials at least stabilize and begin ignoring negative news. While the higher-quality names in the financial sector are likely near tradable bottoms, I expect the sector to continue to underperform more growth-oriented areas over the intermediate term. The weakness in energy shares is telling considering the recent rise in oil. As well, steel (-5.3%) and gold (-5.5%) were two of today's worst-performing sectors. I continue to believe global growth has likely peaked for a number of years and that those securities priced as though the global boom would continue indefinitely will underperform the most over the intermediate term. I do not believe global growth will fall dramatically, but a return to more average rates is likely. U.S. high-quality “growth” stocks should remain solid outperformers in this type of macro environment. The VIX is finishing above 30.0 for the first time since the first quarter of 2003. Other gauges of investor angst are very elevated as well. I expect a sharp rally to materialize sometime over the next week, but it could be from lower levels. Keep watching the financials and their reaction to negative news as a tell for a potential rally. The Nikkei futures are indicating a down 200 open in Japan.

Stocks Lower into Final Hour on Credit Fears and Technical Selling

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Computer longs, Semi longs and Internet longs. I took profits in a few of my (IWM)/(QQQQ) hedges, took a bit off the table in my (BHP) short and then added back to my (IWM)/(QQQQ) hedges today, thus leaving the Portfolio 50% net long. The overall tone of the market is negative today as the advance/decline line is lower, most sectors are declining and volume is above average. My intraday gauge of investor angst is elevated again. Today was the deadline for redemption notices for some large hedge funds that have been under duress. This could help lift some uncertainty regarding the situation going forward. The Bloomberg Base Metal Spot Index is dropping down through its 50-week moving-average convincingly for the first time since the metal bull market really took off in 2002. I took some profits in my BHP Billiton (BHP) short this morning, however, as it has become too oversold. I plan to build this position back up on any bounce higher to around $60-$62. Biotechnology has displayed notable relative strength of late. Gilead Sciences (GILD) remains my favorite in the group. I expect US stocks to trade mixed-to-lower into the close from current levels on credit fears and technical selling.

Today's Headlines

Bloomberg:
- Chancellor Angela Merkel’s Cabinet today agreed to tighter transparency rules for private equity and hedge funds, reneging on an earlier promise to the finance industry to remove clamps that are holding up investment.
- Emerging-market shares and currencies fell, with Indonesian stocks tumbling the most in three years, after widening losses linked to US subprime loans prompted investors to shun riskier assets.
- Tropical Storm Erin formed over the Gulf of Mexico today and is forecast to hit the south Texas coast tomorrow, while another system is gaining strength in the Atlantic Ocean and heading toward the Caribbean.
- Wind River Systems(WIND) shares rose as much as 9.8% today after a Web site that reports on technology companies said the software consultant might be bought by IBM(IBM).

Wall Street Journal:
- NY Democratic Senator Charles Schumer supports a proposed tax increase on managers of hedge funds and private-equity firms provided the increase applies to other investment partnerships.
- More US companies are basing bonuses and pay increases on job performance, citing a survey by Mercer Human Resource Consulting.
- DirecTV Group(DTV), may announce today an agreement with Current Group LLC to provide high-speed Internet service over electric-power lines.

NY Times:
- Seven US labor unions are asking the government to order employers to bargain with them, even when they don’t represent a majority of employees.

Interfax:
- China’s copper production rose 14% in the first seven months of the year to 1.86 million metric tons.

Inflation Decelerates, NY Manufacturing Healthy, International Demand for US Assets Near Record, Production Rises

- The Consumer Price Index for July is estimated to rise .1% versus estimates of a .1% gain and a .2% increase in June.

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

- Empire Manufacturing for August rose to 25.1 versus estimates of 18.0 and 26.5 in July.

- Net Long-term TIC Flows for June fell to $120.9 billion versus estimates of $63.0 billion and $126.0 billion in May.

- Industrial Production for July rose .3% versus estimates of a .3% increase and a .6% gain in June.

BOTTOM LINE: Consumer prices in the US rose .1% in July, the smallest gain in eight months, after Americans paid less for gasoline and food costs moderated, Bloomberg said. So far this year, core prices are rising at a 2.3% rate versus a 3% rate in the first seven months of last year. The headlines CPI rose at a 2.4% rate year-over-year versus the long-term average of 3.1%. Gasoline prices fell 1.7% during the month of July. Food prices rose .3% versus a .5% increase in June. Auto prices were unch. for the second month in a row. I continue to believe inflation will decelerate further over the intermediate term as energy and food prices fall meaningfully from current levels.

Manufacturing in NY state unexpectedly held near the highest level in more than a year in August and companies were more optimistic about the future, a Federal Reserve report showed. The component measuring the outlook for the next six months rose to 50.4 from 48.2. The Prices Paid component fell to 34.4 from 34.6 the prior month. I continue to believe manufacturing will help boost overall growth over the intermediate-term as companies gain confidence in the sustainability of the current expansion and rebuild depleted inventories.

International buying of US securities unexpectedly held close to an all-time high in June, Bloomberg said. International demand for US government debt, mostly by central banks, doubled in June. China reduced its holdings of US Treasury securities for a third straight month, by $2.3 billion, to $405.1 billion. International investors’ holdings of US stocks rose a net $28.8 billion. The difference between the US trade deficit and securities bought by international investors is a gauge of how easily the US can finance its external debt. I continue to believe international demand for US assets will stay strong over the intermediate-term.

Industrial production in the US rose in July as manufacturers turned out more computers, motor vehicles and business equipment, Bloomberg said. Utility production declined 2.1% on cooler weather. Weather this month has turned warmer nationwide. Capacity Utilization came in at 81.9%, slightly above long-term average levels. I expect Industrial Production to rise more this month and capacity utilization to inch slightly higher.

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