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Tuesday Watch

Late-Night Headlines
Bloomberg:
- Biovail Corp. plants to pursue a lawsuit against a group of hedge funds it accuses of driving down its share price after settling a separate case.
- Third Avenue Management LLC, the money manager founded by Martin Whitman, more than quadrupled its stake in mortgage insurer Radian Group(RDN), buying into a housing slump that sent the stock down 67% in two months.
- China’s inflation quickened to the fastest pace in more than a decade, raising the likelihood of the fifth interest-rate increase since March to cool the economy.
- Japan’s machinery orders surged at three times the pace forecast by economists in July, easing concern the economy will contract for a second quarter.
- Mediatek Inc., Taiwan’s biggest semiconductor designer, climbed to a record on Taipei’s stock exchange after the company said it will buy Analog Devices’ mobile-phone chip business.
- Recalls of Chinese goods by US companies almost tripled in the past three months, threatening to cut overseas revenue for the world’s biggest consumer-products exporter.

Wall Street Journal:
- The two top US officials in Iraq sketched out a plan to end the troop surge by next summer, but they left unanswered questions about how quickly the pullout would proceed beyond July and how US strategy might shift if Iraq’s civil war continues.
- Senator Hillary Rodham Clinton will return $850,000 in campaign contributions raised by a major fund-raiser who has come under federal investigation on multiple fronts.

MarketWatch.com:
- Argus Research economist is MarketWatch’s forecaster of the month.
- Virtualization market wave still worth riding. Opportunities remain after VMWare’s(VMW) blowout IPO.

CNNMoney.com:
- Apple(AAPL) could go after major chunk of airwaves. The consumer tech giant, rapidly diversifying, could make a bid for a portion of a national wireless network with faster Internet access than cellular or Wi-Fi.
- Wachovia is grabbing more mortgage business as a result of the recent shakeout in the industry, CEO Thompson said.

MySteel.com:
- China’s stainless steelmakers may need to curb further investment on production capacity, citing an official at the China Iron & Steel Association.

Automotive News:
-.The United Auto Workers union held two meeting with workers from Honda Motor’s Alabama auto-assembly plant last month in an initial attempt to convince them to join, citing a plant employee.

Financial Times:
- Highbridge Capital Management LLC, the JPMorgan Chase(JPM) hedge-fund business, raised $20 billion in the first half of the year, increasing its assets under management to $37 billion, citing data from Absolute Return magazine.

Nikkei:
- Japan’s ruling Liberal Democratic Party will submit a bill as early as next week to allow military support for the US war in Afghanistan.

China Daily:
- Terrorism poses the most serious threat to a successful Beijing Olympics in 2008, citing Minister of Public Security Zhou Yongkang.

Late Buy/Sell Recommendations
- None of note

Night Trading
Asian Indices are unch. to +.50% on average.
S&P 500 futures +.06%.
NASDAQ 100 futures +.04%.

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Earnings of Note
Company/EPS Estimate
- None of note

Upcoming Splits
- (FMC) 2-for-1

Economic Releases
8:30 am EST
- The Trade Deficit for July is estimated to widen to -$59.0 billion versus -$58.1 billion in June.

Other Potential Market Movers
- The Fed’s Bernanke speaking, weekly retail sales reports, (TXN) mid-quarter update, (DUK) analyst meeting, (ECL) analyst meeting, (SLE) analyst meeting, (EAT) analyst day, IBD/TIPP Economic Optimism Index, Wachovia Services Conference, Morgan Stanley Industrials Conference, Jeffries Media/Communications Conference, Lehman Brothers Financial Services Conference, BMO Back to School Conference and Bear Stearns Healthcare Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by real estate and commodity 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 Mostly Lower, Pressured by Commodity, Retail and Homebuilding Shares

Indices
S&P 500 1,451.70 -.13%
DJIA 13,127.85 +.11%
NASDAQ 2,559.11 -.26%
Russell 2000 769.81 -.77%
Wilshire 5000 14,574.91 -.26%
Russell 1000 Growth 586.61 -.14%
Russell 1000 Value 810.47 -.26%
Morgan Stanley Consumer 704.79 +.08%
Morgan Stanley Cyclical 992.41 -1.14%
Morgan Stanley Technology 632.80 -.01%
Transports 4694.29 -.82%
Utilities 486.59 +.28%
MSCI Emerging Markets 132.91 -.29%

Sentiment/Internals
Total Put/Call 1.17 +1.74%
NYSE Arms 1.33 -50.54%
Volatility(VIX) 27.38 +4.38%
ISE Sentiment 87.0 -43.51%

Futures Spot Prices
Crude Oil 78.13 +1.84%
Reformulated Gasoline 199.50 +.43%
Natural Gas 5.94 +8.05%
Heating Oil 218.70 +2.04%
Gold 712.30 +.37%
Base Metals 225.72 -2.28%
Copper 325.15 unch.

Economy
10-year US Treasury Yield 4.33% -5 basis points
US Dollar 79.85 -.13%
CRB Index 314.78 +.79%

Leading Sectors
Defense +.71%
Medical Equipment +.52%
Restaurants +.41%

Lagging Sectors
Retail -1.78%
Steel -2.17%
Homebuilders -2.46%

Evening Review
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Afternoon Recommendations
Deutsche Bank:
- Added (GES) to short-term trading list, reiterated Buy.

Afternoon/Evening Headlines
Bloomberg:
- Thornburg Mortgage(TMA), the home lender that sold $20.5 billion of mortgage bonds at a loss last month to ease a cash shortage, now plans $3 billion to $4 billion of purchases to take advantage of low prices.
- Weyerhaeuser Co.(WY), North America’s largest lumber producer, said it may close or restrict output at wood-product mills because demand hasn’t increased this quarter as the US housing industry slumps.
- Zinc fell to the lowest in 17 months as growing stockpiles stoked concern that a glut of the metal will increase.
- Western Digital Corp.(WDC), the world’s second-largest maker of hard-disk drives, boosted its first-quarter profit and sales forecast as orders surged industrywide.

LOOPRumors.com:
- Very reliable sources are informing LOOPRumors that Apple is working on a major update to Apple TV which will include an option for the iTunes Store.

BOTTOM LINE: The Portfolio finished higher today on gains in my Semi longs, Computer longs, Medical 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 lower, sector performance was mixed and volume was about average. Measures of investor anxiety were elevated into the close. Today's overall market action was mildly bearish. The reversal higher in financials was a big positive, however, retail, commodity and homebuilding stocks remained sources of weakness throughout the day. Brazil's Bovespa finished 3.5% lower, near session lows, as well. As I said last week, it appears that both bulls and bears still lack conviction at current levels. Investor anxiety remained elevated throughout the day. I wouldn't be surprised to see more near-term choppiness before a more positive finish to the week.

Stocks Higher into Final Hour, Led by Reversal in Financials and Strength in Tech

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Computer longs, Semi longs and Medical longs. I have not traded today, thus leaving the Portfolio 75% net long. The overall tone of the market is mildly negative today as the advance/decline line is slightly lower, most sectors are gaining and volume is about average. In tech today, Intel (INTC) boosted guidance on strong global demand, Philips (PHG) raised margin targets on cost-cutting, Advanced Micro Devices (AMD) rolled out Barcelona, and Apple (AAPL) sold its millionth iPhone. As well, IDC said the portable navigation device market will double this year. In the financial arena, the three-month libor rate is ticking down 2 basis points, the first decline in three weeks. Jefferies upgraded Thornburg (TMA) to hold and billionaire currency trader Joseph Lewis took a 7% stake in Bear Stearns (BSC). Goldman Sachs(GS), a source of angst during the August pullback, is breaking higher from its recent trading range. Finally, the Fed's Lockhart said the jobs data are very important and concerns over a dollar selloff are way overdone. The 10-year yield is falling another 5 basis points, which I still view as more a function of the end of the inflation trade rather than a sign of an impending recession. The IMF actually boosted its forecast for global growth this year to 5.3% from 5.2%. Most investors I know believe that a U.S. recession is unavoidable. Those who don't buy the recession argument, however, believe that as soon as the Fed cuts, it's back to trend or above-trend growth. I, on the other hand, suspect we are in for a period of modestly below-trend growth over the intermediate term regardless of what the Fed does. I still think an imminent recession is highly unlikely. I expect US stocks to trade mixed-to-higher into the close from current levels on more Fed rate cut speculation, short-covering and bargain-hunting.

Today's Headlines

Bloomberg:
- Shipping costs for iron ore and coal are at a record because of speculation by hedge funds and don’t reflect supply and demand, said Sempra Metals Ltd. There has been a breakdown in the “traditional correlation” between shipping delays at Newcastle, the world’s biggest coal harbor, and freight rates, John Kemp, a London-based analyst for Sempra said.
- Hedge funds fell 1.31% on average in August, the worst monthly performance since May 2006, led by declines in emerging markets and macro funds.
- Corporations in most industries have sufficient cash and access to funding to “ride out” current credit market constraints and repay debt due over the next 28 months, Fitch Ratings said.
- Investor concern about securities backed by some so-called Alt-A and jumbo US mortgages has eased from its highs late last month, according to data from Deutsche Bank AG.
- Billionaire Joseph Lewis, the British-born, Bahamas-based currency trader, paid $860.4 million for a 7% stake in Bear Stearns(BSC), making him the beleaguered brokerage firm’s largest shareholder.
- Intel Corp.(INTC), the world’s largest chipmaker, raised its quarterly sales forecast after taking customers from Advanced Micro Devices(AMD).

Wall Street Journal:
- Hunt Oil’s contract with Kurdish officials to drill for oil in northern Iraq’s Kurdistan may indicate that Western oil companies are now willing to bypass the central Iraqi government and deal with regional officials.
- Democratic presidential candidates tried to burnish their credibility with Latino voters in a debate yesterday evening that skewed heavily toward immigration policy, international relations in the Americas and universal health care for US residents.
- Inventors who have grown impatient with Yahoo Inc.(YHOO) may have to wait awhile longer to see any pop in its stock.
- Hedge fund managers expect market volatility to continue and competition for affluent investors to lead to more purchases of hedge fund firms, according to recent surveys.
- The US is planning to build a major base on the Iraqi border with Iran and a series of fortified checkpoints to halt what it says is a flow of weapons and explosives from Iran.
- US programs that reward companies for cutting electricity use are reporting good results.
- Antiwar advocates targeting the performance of Iraq’s government to justify demands for the withdrawal of US troops are “flawed” in their reasoning, Senators John McCain and Joe Lieberman wrote ahead of congressional testimony by General David Petraeus. Withdrawing troops will not “shock” Iraqi leaders into reconciliation, but rather reverse gains against al-Qaeda and sectarian violence in the country, they said.

Washington Post:
- Sixty percent of Americans said they think the US is safer than it was before Sept. 11, 2001, citing a new poll.

NY Post:
- NFL coaches’ salaries grew faster than those of CEOs and the league’s players over the past 10 years.

MySteel.com:
- China’s steel-product exports rose 84% to 45.1 million metric tons in the first eight months, from a year earlier, citing preliminary figures from the customs.

CNNMoney.com:
- Toys ‘R’ Us commits to more safety checks.

Financial Times Deutschland:
- The IMF has raised its forecast for global economic growth this year to 5.3% from 5.2%, citing people close to the IMF.

Economic Releases

- None of note