Stocks Slightly Higher into Final Hour on Positive Economic Data

BOTTOM LINE: The Portfolio is about even into the final hour as losses in my Computer longs and Retail longs are being offset by gains in my Medical longs and Biotech longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is slightly positive today as the advance/decline line is mildly higher, most sectors are rising and volume is below average. The market's initial reaction to tomorrow's jobs report will likely be negative. I still think non-farm payrolls will come in below estimates of 100,000. As well, the unemployment rate could tick slightly higher. This should further boost the chances of a Fed rate cut. Given the recent strong surge higher off the lows, however, stocks may initially weaken on worries that the economy will slow too much going forward. Moreover, a number that meets or beats expectations will likely lead to more talk that the Fed won't cut rates at the upcoming meeting, which will also probably pressure stocks initially. While the initial reaction will likely be a negative one, I wouldn't be surprised to see stocks rally later in the afternoon given how many bulls are underinvested and how many bears added to their shorts near the lows in anticipation of an imminent recession. The 10-year yield is moving to session highs over the last hour, in a delayed reaction to this morning's positive data. I expect US stocks to trade mixed into the close from current levels on rising apprehension ahead of tomorrow’s jobs report.

Today's Headlines

Bloomberg:
- Lowe’s Cos(LOW) increased the size of its proposed sale of senior bonds to $1.3 billion, making the offering its biggest ever.
- Federal Reserve Bank of Atlanta President Dennis Lockhart said he hasn’t seen conclusive signs that the US housing recession has harmed the wider economy.
- Nucor Corp.(NUE), the second-largest US-based steelmaker, said it plans to buy back as much as $1.66 billion of its shares after profit rose to a record.
- Lexmark Intl.(LXK), the second-largest US printer maker, gained the most in more than a year after Sanford C. Bernstein said “healthy” demand will fuel profit growth.
- Wal-Mart Stores(WMT), Macy’s Inc. and retailers catering to teenagers reported August sales that topped analysts’ estimates on purchases of clothing and electronics for the new school year.

Wall Street Journal:
- Seagate Technology(STX) is introducing drives for desktop computers that use special chips to encrypt information to make it unreadable if a computer equipped with the devices falls into the wrong hands.

NY Times:
- Amazon.com Inc.(AMZN) plans to release an electronic book reader in October named Kindle that will let users download books wirelessly through an e-book store on the retailer’s Web site.

Productivity Healthy, Unit Labor Costs Decline, Jobless Claims Below Estimates, Service Sector Healthy, Prices Paid Declines

- Final 2Q Non-farm Productivity rose 2.6% versus estimates of a 2.4% gain and a prior estimate of a 1.8% increase.

- Final 2Q Unit Labor Costs rose 1.4% versus estimates of a 1.5% gain and a prior estimate of a 2.1% increase.

- Initial Jobless Claims fell to 318K versus estimates of 330K and 337K the prior week.

- Continuing Claims rose to 2598K versus estimates of 2575K and 2573K prior.

- ISM Non-Manufacturing for August rose to 55.8 versus estimates of 54.5 and a reading of 55.8 in July.

BOTTOM LINE: Worker productivity in the US accelerated more than forecast in the second quarter and labor costs cooled, lowering the risk of a pickup in inflation as the Fed weights cutting interest rates, Bloomberg said. Productivity rose at a 2.6% annual rate, the most in 2 years. Productivity at non-financial companies, a gauge closely monitored by the Fed, jumped 3.5% in 2Q versus a .7% gain in 1Q. This data gives the Fed more leeway to cut rates if necessary.

The total number of Americans receiving unemployment benefits rose to a six-month high even as new applications fell more than forecast last week, Bloomberg reported. The four-week moving average for initial jobless claims rose to 325,750, the highest since April. As well, the unemployment rate among those eligible for benefits, which tracks the US unemployment rate, rose to 2% from 1.9%. While the job market has slowed a bit, it is still healthy by historical standards. I continue to believe it will remain healthy over the intermediate-term without generating substantially unit labor cost increases.

Service Industries that make up 90% of the US economy grew more than forecast in August, confirming the Fed’s view that the impact of the credit-market rout is “limited” outside of housing. The new orders component rose to 57 from 52.8, the biggest increase in 11 months. However, the employment component fell to 47.9 from 51.7 in July. The prices paid component fell to 58.6, the lowest since February, versus 61.3 in July. This report and better-than-expected retail sales in August illustrate the economy’s resilience. I still see little evidence of a substantial imminent economic slowdown even as investors continue to price this into stocks at current levels.

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Thursday Watch

Late-Night Headlines
Bloomberg:
- Total assets of US money market mutual funds rose to another all-time high of $2.73 trillion this week.
- AstraZeneca Plc, the UK’s second-largest pharmaceutical company, sold $6.9 billion of bonds in the biggest US debt offering in more than five years
- The Reserve Bank of Australia has widened the range of securities it’s willing to buy in so-called repurchase agreements in order to boost the amount of money available in the nation’s banking system.
- Former Senator Fred Thompson said he’s getting in the race for the Republican presidential nomination after six months of flirting with a run.
- Yoshio Ishizaka, senior adviser to the board of Toyota Motor(TM), says subprime impact on auto sales is limited.

MarketWatch.com:
- Stock volume has triggered 3 rare technical events, and all are bullish.

USAToday.com:
- Federal regulators appear set to crack down on cable companies that sign exclusive deals with apartment and condominium buildings, denying residents the fruits of emerging pay-TV competition.

CNNMoney.com:
- John Deere’s(DE) renewable energy harvest.
- Cisco reaffirms outlook on strong demand.

Economic Times:
- Ranbaxy Laboratories Ltd. has submitted a non-binding preliminary bid to buy Bradley Pharmaceuticals(BDY).

Financial Times:
- Silicon Valley’s annual coming-out season for tech start-ups is about to turn into a stampede. In the next few weeks, the wraps will be removed from some 150 new companies and products at a handful of events in California competing to identify the tech industry’s Next Big Thing.
- Hedge funds, private equity groups and investment banks are raising billions of dollars to buy leveraged loans in the belief that banks will have to sell $250 billion of debt on the cheap.

London-based Times:
- Speculators in the carry trade put the growth prospects of the developing world at risk and are a bigger threat to stability than the current credit crunch, citing the annual report by the UN Conference on Trade and Development.
- Hedge funds suffered one of their worst performances last month since the collapse of Long Term Capital Management in 1998, data from Hedge Fund Research show.

Late Buy/Sell Recommendations
Citigroup:
- Today, Citi hosted an upbeat investor meeting with (RATE) CEO Tom Evans. Evans said 1) Advertiser demand remains strong 2) August traffic was the best of the year (August is typically average) 3) Less than 1% of RATE’s clicks are related to sub-prime, and RATE continues to see strong demand for prime mortgages 4) RATE’s deposit business remains strong (46% of total revenue in Q2, surpassing mortgages for the first time) and 5) RATE continues to see strong tailwinds due to the continued migration of advertising online.
- Upgraded (PTV) to Buy, target $37.

Morgan Stanley:
- Reiterated Overweight on (COGN), target $50.

Night Trading
Asian Indices are -.50% to +.50% on average.
S&P 500 futures +.23%.
NASDAQ 100 futures +.21%.

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Earnings of Note
Company/EPS Estimate
- (CPB)/.18
- (CAE)/1.05
- (COO)/.70
- (FLE)/-.08
- (HOV)/-1.00
- (ISLE)/.13
- (JTX)/-.46
- (KWD)/.34
- (KFY)/.36
- (MOV)/.42
- (NSM)/.25
- (ZQK)/.02
- (UTIW)/.28
- (PAY)/.40

Upcoming Splits
- (MTW) 2-for-1
- (MDR) 2-for-1
- (NVDA) 3-for-2

Economic Releases
8:30 am EST
- Final 2Q Non-farm Productivity is estimated to rise 2.4% versus a prior estimate of a 1.8% increase.
- Final 2Q Unit Labor Costs are estimated to rise 1.5% versus a prior estimate of a 2.1% gain.
- Initial Jobless Claims for last week are estimated to fall to 330K versus 334K the prior week.
- Continuing Claims are estimated to fall to 2575K versus 2579K prior.

10:00 am EST
- ISM Non-Manufacturing for August is estimated to fall to 54.5 versus 55.8 in July.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil drawdown of -2,200,000 barrels versus a -3,486,000 barrel decline the prior week. Gasoline supplies are expected to fall by -1,300,000 barrels versus a -3,667,000 barrel decline the prior week. Distillate inventories are expected to rise by 1,000,000 barrels versus an 889,000 barrel increase the prior week. Finally, Refinery Utilization is estimated to fall by -.25% versus a -1.36% decline the prior week.

Other Potential Market Movers
- The Fed’s Yellen speaking, Fed’s Kroszner speaking, Fed’s Lockhart speaking, Fed’s Fisher speaking, ICSC Chain Store Sales, ECB Policy Meeting, (JNPR) investor gathering, (MDP) analyst day, (ARG) analyst meeting, (MIL) analyst meeting, (TPX) analyst meeting, (NCC) analyst conference, Cowen Clean Energy Conference, Thomas Weisel Healthcare Conference, CSFB Global Automotive Conference, Kaufman Brothers Investor Conference, Citigroup Tech Conference, Lehman Brothers Energy Conference, Goldman Sachs Global Retailing Conference, the Lehman Brothers Consumer Conference, Needham HDD Investor Day and the Morgan Keegan Equity Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by automaker and financial stocks in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 100% net long heading into the day.

Stocks Finish Lower on Economic Data, Profit-Taking

Indices
S&P 500 1,472.29 -1.15%
DJIA 13,305.47 -1.07%
NASDAQ 2,605.95 -.92%
Russell 2000 790.46 -1.28%
Wilshire 5000 14,804.23 -1.09%
Russell 1000 Growth 595.33 -.91%
Russell 1000 Value 822.43 -1.30%
Morgan Stanley Consumer 709.66 -1.10%
Morgan Stanley Cyclical 1,020.41 -1.47%
Morgan Stanley Technology 642.45 -.75%
Transports 4831.05 -1.80%
Utilities 488.14 -1.16%
MSCI Emerging Markets 133.84 -1.06%

Sentiment/Internals
Total Put/Call 1.15 +11.65%
NYSE Arms 1.60 +153.37%
Volatility(VIX) 24.58 +7.90%
ISE Sentiment 104.0 -26.76%

Futures Spot Prices
Crude Oil 75.85 +1.03%
Reformulated Gasoline 199.99 +.45%
Natural Gas 5.83 +3.59%
Heating Oil 210.50 +1.23%
Gold 691.50 unch.
Base Metals 232.96 +.72%
Copper 326.15 -1.35%

Economy
10-year US Treasury Yield 4.47% -8 basis points
US Dollar 80.61 -.33%
CRB Index 310.92 -.09%

Leading Sectors
Energy -.12%
Networking -.16%
Internet -.17%

Lagging Sectors
I-Banks -2.32%
Retail -2.35%
Homebuilders -2.94%

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Afternoon Recommendations
Deutsche Bank:
- Rated (MSFT) Buy, target $33.

Oppenheimer:
- Rated (BFF) Buy.

Afternoon/Evening Headlines
Bloomberg:
- Citigroup Inc.(C) will close its $2.4 billion Tribeca hedge fund and return money to clients five months after it agreed to buy investment manager Old Lane LP, which uses a similar strategy.
- Orange juice rebounded as investors scooped up cheap supplies and closed bets that prices will fall further after futures touched a 22-month low.
- Nickel fell the most in almost three weeks on the London Metal Exchange as stainless-steel makers, the biggest consumers of the metal, cut prices because of weaker demand. Copper and aluminum also fell.
- Sugar fell to a two-week low on expectations that a global glut will widen and speculation demand is slowing for ethanol, a fuel made from cane and corn, as the US summer driving season wanes.
- Salix Pharmaceuticals(SLXP) had its biggest gain in 3 ½ years in Nasdaq trading after reporting successes in two drug trials.
- ADC Telecom(ADCT), the maker of telecom equipment, said third-quarter profit more than tripled. The stock rose 5.3% in after hours trading.
- JCPenney August same-store-sales fell 4% and the company reaffirmed its sales forecast for Sept./Oct. The stock rose 2.3% in extended trading.
- The J.Crew Group(JCG), the retailer whose shares have doubled since it sold stock to the public last June, fell as much as 11% in extended trading after it posted second-quarter sales below analysts’ estimates. The stock fell 8.7% in after-hours trading.

BOTTOM LINE: The Portfolio finished lower today on losses in my Retail longs, Computer longs and Semi longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was negative today as the advance/decline line finished lower, every sector fell and volume was below average. Measures of investor anxiety were elevated into the close. Today's overall market action was bearish. However, growth stocks, while lower, substantially outperformed value stocks again across all market caps. Apple (AAPL) did experience a sell-the-news reaction to today's announcements, which wasn't surprising after the recent run-up and general market weakness. I think the iPhone price cut is a net positive for the stock and sets the stage for a 3G version, which is likely by year-end, according to Oppenheimer. I will continue to use any meaningful weakness in the stock to add to my long position. Google (GOOG) finished up $2.65, near session highs. I didn't hear any new news this afternoon to account for its relative strength. Johnson Redbook weekly retail sales rose 2.4% this week vs. a 2.3% gain the prior week. This is also up from a 1.4% gain in early July. Over the last month, weekly retail sales have averaged a 2.3% gain, as well. While this is modestly below the long-term average of 2.8%, it does not suggest meaningfully broad-based retail weakness. The fact that sales have improved slightly into the recent credit turmoil is also noteworthy. Here is a summary of the Fed’s Beige Book report that was released this afternoon:

1. The U.S. economy has continued to expand.

2. Most banks say that housing weakness deepened after the market rout.

3. Outside housing, the market impact on the economy is limited.

4. Five Fed banks reported moderate or modest growth.

5. Four Fed banks reported that the pace of activity has slowed.

6. The New York Fed reported continued expansion.

7. Boston and Atlanta Fed banks say that activity is mixed.

8. Most banks cite tighter lending standards for mortgages.

9. Some Fed banks say that credit is available for most consumers, firms.

10. Several Fed banks say tighter credit clouds the housing outlook.

11. Retail sales were generally positive.

Overall, I would classify this report as mixed. However, the tone was slightly more positive than I had expected. I still expect a 25-basis-point fed funds rate cut at the upcoming meeting. I expect the Fed to begin to make more dovish commentary over the near-term before the meeting later this month.