Thursday Watch

Late-Night Headlines
Bloomberg:
- The Doris Duke Charitable Foundation pledged $100 million in grants to help health-care providers in African countries. The NY-based foundation plans to award three to six multiyear grants of $8 million to $20 million starting in early 2009.
- China’s economic growth may slow in the fourth quarter, economists from the State Information Center said, citing a moderation in power generation, steel output and government revenue.
- South Korean consumers became the most optimistic in five years in the third quarter, indicating shoppers may step up spending and spur economic growth.
- China and Russia blocked US and European efforts in the UN Security Council to condemn Myanmar’s military-run government for its crackdown on protesters.

MarketWatch.com:
- Robert Powell: Meet one guru who is “wildly optimistic” about boomer retirement.
- Housing inventory peak?(video)
- Monsanto(MON) expects to triple its international acreage.
- Dell(DELL) sells idea of green technology. Computer guru touts conservation, innovation.
- Ahead of the (yield) curve. Post-Fed curve much steeper, a good sign for the economy.
- A smirking Ahmadinejad suckers the US media.

NY Times:
- Bear Stearns(BSC), its shares and reputation beaten down after the collapse of two hedge funds, has held talks with several investors, including Warren E. Buffett, concerning a possible sale of as much as 20% of the firm, people briefed on the discussions said yesterday.

USA Today.com:
- Medicare’s new policy strains small firms.
- More Chinese-made jewelry and toys recalled.

Financial Times:
- Microsoft(MSFT) said on Wednesday that its Halo 3 video game had lived up to its expectations of being “the biggest entertainment launch in history”, with $170 million in sales recorded in the US alone on the first day of sales.

Reuters:
- The SEC is conducting more than 30 investigations into potential hedge fund manager misconduct in the northeast US alone, with more in other parts of the country, officials said on Wednesday.
- US home goods retailer Bed Bath & Beyond(BBBY) posted a slightly higher quarterly profit on Wednesday on increased sales and a one-time tax benefit and said its board of directors approved a $1 billion share buyback program.
- Paychex Inc.(PAYX), a payroll services company, said on Wednesday that quarterly earnings rose 12%, as it added customers, its check volume grew and it raised prices.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (BBY), target $55.
- We lowered our September same-store-sales estimates for (FDO), (JCP), (KSS), (M) and (TGT) based on unfavorable weather conditions as well as higher gas prices, which likely dampened and weighed on retail spending at the Broadlines retailers in September. Week 1 of this month ranked at the warmest Labor Day week in at least 15 years and Week 3 ranked as the 3^rd warmest in 15 years, while September 2006 was the coolest in several years and the wettest in over a decade, making for difficult compares.

Night Trading
Asian Indices are +.75% to +2.0% on average.
S&P 500 futures +.13%.
NASDAQ 100 futures +.20%.

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Earnings of Note
Company/EPS Estimate
- (CHTT)/.74
- (KBH)/-.74
- (MKC)/.43
- (MTN)/-.89
- (ACN)/.48
- (BE)/.05
- (PLL)/.55
- (TXI)/.89
- (CBK)/.11
- (JBL)/.28
- (CTAS)/.53
- (FINL)/.13
- (FMCN)/.35
- (GPN)/.51

Upcoming Splits
- (FCSX) 3-for-2
- (LPHI) 5-for-4
- (NOV) 2-for-1

Economic Releases
8:30 am EST
- Final 2Q GDP is estimated to rise 3.8% versus prior estimates of a 4.0% gain.
- Final 2Q Personal Consumption is estimated to rise 1.4% versus a prior estimate of a 1.4% increase.
- Final 2Q GDP Price Index is estimated to rise 2.7% versus a 2.7% prior estimate.
- Final 2Q PCE Core is estimated to rise 1.3% versus a prior estimate of a 1.3% gain.
- Initial Jobless Claims for last week are estimated to rise to 316K versus 311K the prior week.
- Continuing Claims are estimated to rise to 2550K versus 2544K prior.

10:00 am EST
- New Home Sales for August are estimated to fall to 825K versus 870K in July.

Other Potential Market Movers
- The Fed’s Rosengren speaking, Fed’s Evans speaking, Fed’s Mishkin speaking, weekly EIA natural gas inventory report, Help Wanted Index, (INTU) investor day, (FCS) analyst meeting, CSFB Chemical Conference and UBS Global Life Sciences Conference could also impact trading today.

BOTTOM LINE: Asian indices are sharply higher, boosted by financial and technology stocks in the region. I expect US equities to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 100% net long heading into the day.

Stocks Finish Higher, Propeled by Gains in the Financial Sector

Indices
S&P 500 1,525.42 +.54%
DJIA 13,878.15 +.72%
NASDAQ 2,699.03 +.58%
Russell 2000 809.12 +.76%
Wilshire 5000 15,269.52 +.56%
Russell 1000 Growth 616.77 +.52%
Russell 1000 Value 850.47 +.60%
Morgan Stanley Consumer 744.88 +.90%
Morgan Stanley Cyclical 1,055.17 +1.02%
Morgan Stanley Technology 664.29 +.12%
Transports 4,834.12 +.57%
Utilities 512.04 +.67%
MSCI Emerging Markets 147.30 +.87%

Sentiment/Internals
Total Put/Call .85 -26.09%
NYSE Arms .81 -15.56%
Volatility(VIX) 17.63 -5.22%
ISE Sentiment 134.0 -11.84%

Futures Spot Prices
Crude Oil 80.50 +1.22%
Reformulated Gasoline 202.46 -.65%
Natural Gas 6.42 +.99%
Heating Oil 218.25 +.06%
Gold 735.70 -.42%
Base Metals 251.59 +1.79%
Copper 361.90 -.28%

Economy
10-year US Treasury Yield 4.62% unch.
US Dollar 78.52 +.27%
CRB Index 331.92 +.07%

Leading Sectors
I-Banks +2.13%
Biotech +1.36%
Restaurants +1.30%

Lagging Sectors
Oil Tankers -1.19%
Gold -1.61%
Homebuilders -2.42%

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Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- US stocks rallied the most in a week after GM(GM) agreed on a contract with the UAW and investors speculation billionaire Warren Buffett will buy a stake in Bear Stearns(BSC).
- US Treasury Secretary Henry Paulson called on Congress to pass legislation that would permanently bar taxes on Internet access services.

NY Times:
- Buffett, Others Said to Consider Bear Stearns Stake.

BOTTOM LINE: The Portfolio finished higher today on gains in my Biotech longs and Medical longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was positive today as the advance/decline line finished higher, most sectors rose and volume was around average. Measures of investor anxiety were around average into the close. Today's overall market action was bullish. Semis, homebuilders and oil service didn't participate, however, airlines, restaurants, retail, biotech, investment banks, wireless, steel and alternative energy all posted 1%+ gains. Under Armour (UA) fell over 6% today on a downgrade from UBS. Their rationale basically revolved around unusually warm weather this month. I will use any further meaningful weakness in the shares to add to my long position. Cyclicals outperformed today, rising 1.02%, even as many pointed to the durable goods report as evidence of economic weakness. I expect durable goods orders to bounce back next month. Growth stock leaders underperformed today, which isn't surprising given recent outsized gains. Investors Intelligence showed an increase in bullishness today, however, as I have posted many times before, I don't believe this sentiment indicator has a very good track record as a contrary indicator. I look at dozens of gauges of investor sentiment. I usually highlight the AAII numbers because they are a much better contrary indicator, in my opinion. I still argue that overall investor sentiment toward U.S. stocks has never been this bad in history with the S&P 500 just off a record high, which bodes very well for an extension of the huge gains we have seen since the bottom in 2002.We could get some early morning weakness tomorrow on more weak housing data and profit-taking, however I still believe pullbacks will remain muted and short-term in nature.

Stocks Surging into Final Hour as Tech Sector Index Approaches 7-year High and Financials Jump

BOTTOM LINE: The Portfolio is higher into the final hour on 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 positive today as the advance/decline line is higher, sector performance is positive and volume is about average. The I-bankers are jumping 3% on news that Warren Buffett may take a stake in Bear Stearns(BSC). Google (GOOG) and Apple (AAPL) opened weaker, but I wouldn't read too much into that considering their recent explosion higher and relatively low correlation with the S&P 500. Google is now 23% higher and Apple 79% higher year-to-date. These two remain my largest long positions, just ahead of Intuitive Surgical (ISRG), which is 140% higher for the year. I remain very long-term bullish on all three. AppleInsider is reporting today that Apple (AAPL) may release a new PDA device by the middle of next year. Apple is selling off slightly today after its recent strong run. I think it still isn't too late for longer-term investors to build positions in Apple on pullbacks. As with Google (GOOG), I think the stock can grow at a relatively high rate for much longer than many investors expect. I think the stock also will see multiple expansion as it continues to beat estimates, growth-stock outperformance continues and interest rates remain low. The Morgan Stanley Tech Index is making a 52-week high today. It is now at the highest level since February 2001. It is up 17.8% for the year and 25.3% higher over the last 12 months. This is a huge story that is mostly ignored in favor of 24/7 coverage of the "housing depression." I think that the fundamentals and technicals are in place for tech's outperformance to continue over the intermediate term. The NYSE Arms has been above average most of the day, despite gains in the major averages, which is a positive. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, strength in the financial sector and investment manager performance anxiety.

Today's Headlines

Bloomberg:
- Saudi Arabian central bank Governor Hamad Saudi al-Sayari said the bank would keep the peg to the US dollar and intervene in markets to maintain the currency system and control the amount of money in the financial system.
- US auto-parts makers including American Axle and Lear rose in NY trading on optimism that General Motors(GM) tentative labor accord would stabilize the industry.
- The risk of owning the bonds of US automakers fell to the lowest in more than two months as General Motors(GM)’s ability to win historic cost concessions from its largest union of workers raised optimism that Ford(F) and Chrysler can do the same.
- Bear Stearns(BSC) shares rose the most in almost two weeks on speculation an Asian company plans to buy a stake in the fifth-largest US investment bank.

Wall Street Journal:
- Technology stocks are posting big gains, after a long period when they were scoffed at by the market, and some money managers say the recent rally is just the beginning.

Reuters:
- Iran sees no need for OPEC to raise production again even after oil prices rose to a record, citing Iranian Acting Oil Minister Gholamhossein Nozari.

O Estado de S. Paulo:
- Petroleo Brasileiro SA(PBR), Brazil’s state controlled oil company, confirmed the discovery of two high-quality oil deposits below a layer of salt off the coast of Espirito Santo state.

Durable Goods Orders Fall After Large Increase the Prior Month

- Durable Goods Orders for August fell 4.9% versus estimates of a 4.0% decline and an upwardly revised 6.1% gain the prior month.

- Durables Ex Transports for August fell 1.8% versus estimates of a 1.0% decline and a downwardly revised 3.4% gain in July.

BOTTOM LINE: Orders for US-made durable goods fell in August after July’s large increase that was the most in almost a year, Bloomberg reported. Demand for autos dropped 6.2% versus an 11% surge in July. In July, auto dealers may have been trying to boost supplies ahead of a possible strike at General Motors(GM). Non-defense capital goods orders ex aircraft, a gauge of future business investment, fell .7% versus a .9% gain in July. However, shipments of those items rose .8% after no change in July. Unfilled orders for capital equipment rose 1.2%, which suggests manufacturers had enough demand to keep manufacturing lines busy over the coming months. Inventories of durable goods fell .1%, the first decline since February 2006. I expect volatile durable goods orders to bounce back next month. I still think manufacturing will help add to overall US growth over the intermediate-term as companies gain confidence in the sustainability of the current expansion and rebuild depleted inventories.

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