Today's Headlines

Bloomberg:
- US stocks rose for the first time in three days on speculation consumers will weather an economic slowdown and spur profit growth.
- LoJack Corp.(LOJN), a maker of electronic devices to track stolen cars, will introduce its services in China because of rising vehicle thefts in the world’s second-largest auto market.
- Y2K Finance Inc., the flagship hedge fund of Wharton Asset Management, will halt redemptions until at least December because of credit market turmoil.
- Thornburg Mortgage(TMA) has a low risk of bankruptcy and the jumbo home-loan specialist is likely to survive the liquidity squeeze in the mortgage markets, UBS said.
- Aluminum production in the US increased 19% in August because of higher demand and the restart of Ormet’s smelter in Ohio.
- OPEC agreed to increase oil production for the first time in more than a year, concerned that near-record prices would damage a world economy already suffering from weakness in the US housing industry.
- ArcelorMittal(MT), the world’s largest steelmaker, plans to increase shipments more than 20% by 2012 to meet surging demand as economies in Asia expand.
- Demand for gasoline in the US fell .8% last week after the summer driving season ended, according to a report today from MasterCard Inc.(MA) based on credit card charges at filling stations.
- McDonald’s Corp.(MCD) said August sales advanced 8.1% as customers bought chicken snack wraps and iced coffee in the US and McFlurry desserts in Europe.
- Comverse Technology(CMVT) rose the most in more than four years in over-the-counter trading after bookings unexpectedly rose.
- ImClone Systems(IMCL), the maker of the cancer treatment Erbitux, surged the most in 3 ½ years on the Nasdaq after a study showed its product helped patients with advanced lung tumors live longer.

Wall Street Journal:
- In Shift, Auto Workers Flee to Health-Care Jobs.
- General Motors(GM) Vice Chairman Bob Lutz said the US automaker is “100% confident” that its electrical-car batteries won’t have the overheating problems that competitor Toyota Motor(TM) has experienced.

NY Times:
- American Electric Power(AEP), anticipating possible renewable-energy quotas, will today announce the installation of battery banks to store power from wind turbines.

EIA:
- Global oil demand growth was revised lower by 100,000 barrels per day for the third quarter.

NY Post:
- Countrywide Financial(CFC) is trying to find additional investors to increase its capital after a rise in problem mortgages and difficulties obtaining credit.
- The NYC City Council yesterday voted 46-2 to override Mayor Bloomberg’s veto of a bill to allow cell phones in public schools.

Chronicle of Higher Education:
- The US Dept. of Education said the default rat on federally guaranteed student loans dropped to 4.6% in fiscal 2005.

Trade Deficit Shrinks Again as Exports Soar to Record

- The Trade Deficit for July shrank to -$59.2 billion versus estimates of -$59.0 billion and -$59.4 billion in June.

BOTTOM LINE: The US trade deficit narrowed in July as exports jumped by the most in three years, Bloomberg reported. The inflation-adjusted trade deficit, used to calculate growth, shrank to a three-year low. Exports rose 2.7%, the most since March 2004, propelled by sales of aircraft, automobiles and telecom equipment. Imports rose 1.8%, reflecting higher prices for oil. An improving trade deficit, lower inflation and inventory rebuilding should help boost US GDP growth to around 2-2.5% on average though year-end, despite all the imminent recession calls.

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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%

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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.