Wednesday Watch

Late-Night Headlines
Bloomberg:
- Goldman Sachs Group(GS) may buy Litton Loan Servicing LP, the Houston-based services of US subprime mortgages.
- Wind Energy Systems Technology was the top bidder in the first sale of leases for offshore wind facilities in Texas, the biggest producer of wind power among US states.
- Wheat plunged the most allowed by exchanges in Chicago and Kansas City on speculation farmers worldwide will plant more after grain prices surged to a record.
- ImClone Systems(IMCL) won US approval to market Erbitux, its only drug, as a medicine proven to help colon cancer patients live longer.
- Australia’s central bank kept its interest rate unchanged for a second month to provide time for policy makers to assess whether global financial-market turmoil will slow economic growth.
- Australia’s August retail sales increased at a faster pace than economists predicted as jobs growth, rising wages and lower gasoline prices stoked spending at restaurants and homewares stores.
- China will prevent foreign investors from taking control of domestic brokerages, a setback to Wall Street’s ambitions to tap the world’s fastest-growing stock market.

USA Today.com:
- So much for the credit crunch killing the merger boom.
- Mazada shows sexy sportscar, hydrogen hybrid.
- Viewership of music videos moved from TV to the Web at such a fast pace that few saw it coming.

Financial Times:
- The number of cases involving manipulation and false price reporting in commodity and commodity futures markets caught by US regulators has reached record levels in the past 12 months.

Canadian Press:
- Canada’s government may add a national security test required in takeovers of Canadian companies by foreign state-owned entities to block a deal by the United Arab Emirates.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (HUM), target $88.
- Reiterated Buy on (VAR), target $51.
- Reiterated Buy on (OMTR), raising estimates and boosting target to $37.

Night Trading
Asian Indices are unch. to +1.25% on average.
S&P 500 futures -.03%.
NASDAQ 100 futures -.08%.

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Earnings of Note
Company/EPS Estimate
- (RPM)/.55
- (WWW)/.52
- (BLUD)/.22
- (ARRO)/.42
- (GRB)/.10
- (IDT)/-.37

Upcoming Splits
- (PCAR) 3-for-2
- (RUSHA) 3-for-2

Economic Releases
10:00 am EST
- ISM Non-Manufacturing for September is estimated to fall to 54.6 versus 55.8 in August.

10:30 am EST:
- Bloomberg consensus estimates call for a weekly crude oil drawdown of -550,000 barrels versus a 1,842,000 barrel build the prior week. Gasoline supplies are estimated to rise by 550,000 barrels versus a 532,000 barrel build the prior week. Distillate inventories are expected to rise by 1,300,000 barrels versus a 1,533,000 barrel increase the prior week. Finally, refinery utilization is estimated to rise by .15% versus a -2.64% decline the prior week.

Other Potential Market Movers
- The Challenger Job Cuts report, ADP Employment Change report, (CBRL) analyst meeting, (NSM) analyst meeting, (RENT) analyst presentation, (MYL) analyst meeting, (APU) analyst meeting, (UGI) analyst meeting, (FUL) analyst meeting, (JBL) analyst meeting, (TOC) investor conference, weekly EIA energy inventory data report, weekly MBA Mortgage Applications report, CIBC Industrials Conference, Gabelli RFID Conference, Deutsche Bank Leveraged Finance Conference and William Blair Small-cap Growth Conference could also impact trading today.

BOTTOM LINE: Asian indices are higher, boosted by financial and technology 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 Mixed on Healthy Below-Average Volume Consolidation

Indices
S&P 500 1,546.63 -.03%
DJIA 14,047.31 -.29%
NASDAQ 2,747.11 +.22%
Russell 2000 831.97 +.88%
Wilshire 5000 15,542.83 +.09%
Russell 1000 Growth 625.94 -.03%
Russell 1000 Value 863.69 +.08%
Morgan Stanley Consumer 751.55 +.16%
Morgan Stanley Cyclical 1,076.86 -.05%
Morgan Stanley Technology 676.42 -.09%
Transports 4,922.85 +.28%
Utilities 508.06 -.15%
MSCI Emerging Markets 154.84 +1.37%

Sentiment/Internals
Total Put/Call .98 +15.29%
NYSE Arms 1.07 +44.84%
Volatility(VIX) 18.49 +3.64%
ISE Sentiment 154.0 +14.07%

Futures Spot Prices
Crude Oil 80.26 +.02%
Reformulated Gasoline 198.62 +.25%
Natural Gas 7.40 +5.04%
Heating Oil 216.47 -.73%
Gold 738.0 -2.12%
Base Metals 250.35 +.55%
Copper 371.80 +.72%

Economy
10-year US Treasury Yield 4.52% -2 basis points
US Dollar 78.30 +.51%
CRB Index 328.62 -1.11%

Leading Sectors
Airlines +3.04%
Homebuilders +2.70%
Retail +1.98%

Lagging Sectors
Defense -1.02%
Energy -1.15%
Gold -3.60%

Evening Review
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In Play

Afternoon Recommendations
CSFB:
- Rated (DVAX), (DYAX), (SVNT) and (PARD) Outperform.

Bank of America:
- Rated (WCC) Buy, target $55.
- Rated (MSM) Buy, target $55.
- Rated (TEL) Buy, target $42.

Morgan Stanley:
- Rated (AMD) Underweight, target $11.
- Rated (INTC) Underweight, target $22.
- Rated (NVDA) Underweight, target $32.

Piper Jaffray:
- Rated (WNS) Outperform, target $25.

Afternoon/Evening Headlines
Bloomberg:
- Investors should buy financial company bonds and leveraged loans to profit over the next three months as the worst credit-market rout in almost a decade recedes and yields fall, according to Bank of America Corp.(BAC).
- Gold fell the most since August after the dollar rebounded from the lowest ever against the euro, reducing the appeal of the precious metal as an alternative investment.
- Meritage Homes(MTH), M/I Homes(MHO)Ryland Group(RYL) led shares of homebuilders higher for a second day on speculation the industry slump deepened by the subprime mortgage crisis is overdone.
- Micro Technology(MU) reported a third straight quarterly loss after its manufacturing costs rose and an industry glut forced down prices. The stock fell 2.8% in extended trading.
- Google Inc.(GOOG) shares may surpass $600 for the first time as investors bet the world’s most popular Internet search engine will capture more sales from companies shifting advertising spending to the Web.
- General Motors(GM) and Honda Motor posted September US sales gains from new models, while declining demand for trucks dragged down Ford Motor(F) and Toyota Motor.

BOTTOM LINE: The Portfolio finished higher today on gains in my Computer 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 slightly below average. Measures of investor anxiety were above average into the close. Today's overall market action was mildly bullish. The Russell 2000 outperformed, rising 0.88% for the day. While the Russell 2000 is still lagging the S&P 500 year-to-date, rising 6.8%, this is solely a function of small-cap value underperformance. The Russell 2000 Growth Index is now 12.7% higher year-to-date, while the Russell 2000 Value Index is 0.6% higher. All market-cap sizes of “growth” stocks have been substantially outperforming “value” stocks for over a year. This is mainly the result of what is going on in the U.S. housing market and more recently the global credit markets. In my opinion, the drag and many of the problems associated with U.S. housing are unlikely to end anytime soon -- even with further Fed rate cuts. The global economy will prevent the U.S. from heading into recession, but modestly-below-trend growth of 2% to 2.5% is likely over the intermediate term as a result. Moreover, inflation, and thus long-term interest rates, is likely to remain below trend as the excesses of housing and credit are worked off. Inflation and GDP mildly below trend provide the best macro backdrop for investing in true growth stocks and should continue to result in P/E-multiple expansion for the first time in many years, in my opinion. Inflows into growth-oriented funds have been basically nonexistent during this entire bull market. I expect that to change in a big way over the coming months, which should further boost the shares. Longer term, the global secular economic boom is likely to experience significant turbulence over the coming years, which should further boost growth stock outperformance. In summary, growth should continue to outperform value for the foreseeable future.

Stocks Mixed into Final Hour on Healthy Consolidation of Recent Gains

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Medical longs and Computer 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 slightly higher, most sectors are rising and volume is around average. Despite today's negative pending home sales report, the homebuilding index is today's top performing sector, rising 3.45%. This is further evidence of just how much bad news is already priced into many stocks. A number of other sectors are gaining today, as well. Airline, gaming, retail, REITs, construction, biotech, investment bank, networking, alternative energy and Internet stocks are all in positive territory. Many market-leading growth stocks are substantially outperforming the broad market again. Google (GOOG) is surging 2%, to $594, an all-time high. I predicted at the beginning of the year that Google would easily surpass $600 before year-end. I now think that $650-$675 is likely. Long term, I expect the stock to rise substantially from current levels as earnings grow at a much higher rate for longer than most investors expect and it finally receives a premium growth stock multiple on those earnings. The stock remains my largest equity long position, just ahead of Apple (AAPL) and Intuitive Surgical (ISRG). According to Dow Jones, the Equity Market Neutral hedge fund strategy fell -0.63% in September, which was the best September for stocks since 1998, as the S&P 500 surged 3.7%. This leads me to believe that these funds are still leaning short, or are just incorrectly positioned. I continue to believe that this strategy, which has seen massive inflows since the bubble burst in 2000, will begin to see significant redemptions very soon and that a large portion of this capital will find its way into more positively correlated U.S. stock strategies. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, lower long-term rates and investment manager performance anxiety.

Today's Headlines

Bloomberg:
- Ciena Corp., (CIEN) the maker of computer-network equipment for telephone companies such as BT Group Plc, climbed the most in three months in Nasdaq Stock Market trading after raising its fourth-quarter profit-margin forecast.
- Crude oil is falling for a third day after the dollar rebounded against the euro, reducing the appeal of commodities as an alternative investment. Gold is also falling $20/oz on US dollar strength.
- JC Flowers & Co. proposed paying $50 a share and warrants valued at as much as $10 a share for SLM Corp.(SLM).
- NY office rents rose last quarter at the slowest pace since the second quarter of 2006, as demand from banks and securities firms began to slacken.
- The euro fell from near a record high against the dollar and halted five days of gains versus the yen as European policy makers expressed mounting apprehension over the pace of the advance.

Wall Street Journal:
- Looking Ahead, Growth Stocks Are the Call. With Inflation Peaking, Fed May Cut Rates Again; ‘Tis the Season for Tech.
- Globalization is giving purchasing managers more clout and demand is growing for people who can run complex networks of relationships, understand foreign cultures and are willing to travel.

Financial Times:
- The European Union is underperforming in the global arena, though it has built up the biggest single market and has the means to tilt the world toward its formula of democracy, human rights and an open society, according to two senior statesmen.

Pending Home Sales Fall

- Pending Home Sales for August fell -6.5% versus estimates of a -2.1% decline and an upwardly revised -10.7% decline in July.

BOTTOM LINE: The number of Americans signing contracts to buy previously owned homes fell in August during the peak of the credit market turmoil, Bloomberg reported. Pending home resales fell 9.5% in the South, 8.3% in the Northeast, 2.9% in the Midwest and 2.7% in the West. Fed fund futures now imply a 76% chance of another 25 basis point rate cut at the upcoming meeting. I expect pending home sales to rebound sharply next month on a meaningful improvement in the credit markets and lower mortgage rates.

Links of Interest

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