Thursday Watch

Late-Night Headlines
Bloomberg:
- Elpida Memory Inc., Japan’s largest computer memory-chip maker, will reduce the number of chips it sells on the spot market to match a new strategy by Hynix Semiconductor.
- A new version of the benchmark loan derivatives index, which added the leveraged buyout debt of First Data Corp.(FDC) and Tribune Co.(TRB), rallied on its first day of trading in a sign that demand for the debt is returning.

Wall Street Journal:
- The FDA may establish a “behind the counter” system allowing more drugs that currently require a prescription to be sold without one.

MarketWatch.com:
- Delta(DAL) flying high after bankruptcy.
- Newsletters remain largely in cash, despite Dow’s record high. That’s bullish from a contrarian point of view.

CNNMoney.com:
- Some of the year’s hottest toys could be sold out weeks before Christmas, industry watchers warned.

Financial Times:
- Citigroup(C) is in talks with KKR to provide financing to buy some of the leveraged loans on its balance sheet. It has also talked to other private equity firms about providing such funding.
- A price war aimed at Japan’s 100 million mobile phone users could have a significant impact on the core consumer price index, potentially prolonging the country’s brush with deflation, economists warned on Wednesday.
- Walt Disney(DIS) has acquired a parcel of beachfront land in Hawaii to develop a hotel resort, part of a new strategy to expand its theme-parks business through smaller, mixed used sites.

Reuters:
- United Auto Workers members at several locals have backed a ground-breaking tentative contract with General Motors(GM) that may serve as a pattern for talks with Ford Motor(F) and Chrysler LLC.

Ming Pao Daily:
- Funds in China may invest more than $18 billion in Hong Kong’s stock market in the next two months. Funds to be raised under China’s qualified domestic institutional investor, or QDII, program, in the next two months will be $36 billion. The funds may allocate half of the money for Hong Kong stocks.

Late Buy/Sell Recommendations
Citigroup:
- Rated (MTG) Buy, target $63.
- Reiterated Buy on (EL), target $48.
- Reiterated Buy on (PX), target raised to $93.

Morgan Stanley:
- We are initiating coverage of the North American steel industry with a Cautious view. Steel stocks do not appear to be discounting the one-two punch of a deteriorating supply-demand balance and slowing global growth that we expect next year. Our top short idea is US Steel(X).
- Although we are long-term bulls on oil prices, tactically we think energy stocks will underperform in the coming three to six months. Relative valuations are unattractive – in the last month the sector offered a yield below the market for only the second time in history. Sentiment on the stock is very bullish, which we take as a good contrarian sell signal. Earnings growth in the next few years will be sub-par while free cash flow is falling and the free cash flow yield is the second lowest of the ten big sectors. In the short-term, we think consistently weak seasonality(energy underperformed by 6.7% on average in the last ten 4Qs), falling dollar and high expectations for 4Q represent headwinds.

Wachovia:
- Rated (MU), (NOK), (XLNX), (MSCC), (DELL), (ADI), (INTC), (HPQ), (CAMD) and (BRCM) Outperform.

BMO Capital:
- Rated (AAPL) Outperform, target $182.

Night Trading
Asian Indices are -1.0% to -.75% on average.
S&P 500 futures +.10%.
NASDAQ 100 futures +.11%.

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Earnings of Note
Company/EPS Estimate
- (AYI)/1.18
- (STZ)/.33
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- (ISCA)/.56
- (MAR)/.30
- (PLL)/.55
- (CMN)/.16
- (LWSN)/.04
- (SLR)/.05

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

Economic Releases
8:30 am EST
- Initial Jobless Claims for last week are estimated to rise to 310K versus 298K the prior week.
- Continuing Claims are estimated to fall to 2550K versus 2551K prior.

10:00 am EST:
- Factory Orders for August are estimated to fall 2.8% versus a 3.7% rise in July.

Other Potential Market Movers
- The Fed’s Mishkin speaking, Fed’s Fisher speaking, ECB policy meeting, weekly EIA natural gas inventory data report, (FLO) analyst meeting, (PRX) analyst meeting, (AEP) analyst meeting, (NSTK) analyst meeting and Deutsche Bank Leveraged Finance Conference could also impact trading today.

BOTTOM LINE: Asian indices are lower, weighed down by commodity 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 Below-Average Volume

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Stocks Lower into Final Hour on Profit-Taking

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Retail longs, Medical longs and Biotech longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is negative today as the advance/decline line is lower, most sectors are declining and volume is around average. Intuitive Surgical (ISRG) is surging after Oppenheimer raised its target to $270. I think that is doable before year-end. EchoStar Communications (DISH), which has recently been the subject of buyout speculation, is surging on volume on no news. The dollar is notably strong against the yen of late. The CurrencyShares Japanese Yen Trust (FXY) is breaking down technically. Many market-leading stocks are rising again today, despite mild losses in the major averages. According to Brad Cole, of Cole Partners, commodity hedge fund investments have surged 293% over the last two years and 83% in just the last year, to $55 billion. As well, the number of commodity hedge funds have risen from 134 to 400 over the last two years. This doesn't even take into account all the other investment funds that now allocate a portion of their capital to commodity speculation. In my opinion, speculation by these types of funds is mainly responsible for the huge surge in prices of the underlying commodities over the last couple of years rather than supply/demand fundamentals. I continue to believe the next meaningful global slowdown will result in massive drops in most commodities as many of these funds unwind their long positions and go short. This will likely result in a significant drop in all inflation gauges and talk of disinflation or deflation once again. I still think that the secular trend of disinflation remains firmly in tact. I took profits on my iShares Lehman 20+ Year Treasury Bond (TLT) long awhile back, but I plan to build it back up on any significant rise in yields from current levels. I expect US stocks to trade mixed into the close from current levels less economic pessimism offsets profit-taking.

Today's Headlines

Bloomberg:
- Investment in commodity funds has swollen to about $55 billion, from about $30 billion last year and $14 billion two years ago, said Brad Cole, founder of Chicago-based Cole Partners Asset Management, which invests in such funds. There are about 400 commodity hedge funds now, up from 203 in 2006 and 134 the prior year.
- Corn is falling for a fourth straight session on signs output from a US record crop will exceed demand and signals that speculators are unwinding bets on higher prices.
- Democratic Senator Charles Schumer said he would introduce legislation to raise taxes on executives at private-equity firms and a broad range of other partnerships.
- Former Fed Chairman Greenspan said the worst of the credit turmoil was over and that US growth should bottom early next year.

Wall Street Journal:
- Wal-Mart(WMT) Influence on Retail Industry Starts to Wane.
- Toyota Tries to Sell Priuses Where Tractors Are Sexy.

NY Times:
- Philip Morris(MO) and Reynolds American(RAI) have begun test marketing snus, a smokeless tobacco that is popular in Sweden.

NY Post:
- Spitzer Popularity Plunges in Quinnipiac Poll.

Financial Times:
- The IAEA is telling Iran that it must answer questions on its uranium enrichment program before the end of 2007 or face new sanctions.

Arab News:
- Saudi Arabia’s most senior Islamic cleric called on the kingdom’s young men to stop waging jihad in Iraq because it damages Islam, citing a speech by Grand Mufti Sheikh Abdul Aziz al-Asheikh.

Service Sector Still Expanding, Job Component Rises

- ISM Non-Manufacturing for September fell to 54.8 versus estimates of 54.6 and 55.8 in August.

BOTTOM LINE: US service industries continued to grow in September, easing concerns that the housing slump will end the six-year expansion, Bloomberg reported. The New Orders component of the index fell to 53.4 from 57 the prior month. The Inventories component fell to 50 from 57. The Prices Paid component rose to 66.1 from 58.6 in August. The Employment component rose to 52.7 from 47.9 the prior month. As well, Challenger reported job cuts fell 28.5% during September and ADP reported 58,000 new jobs were created during the month. I expect the service sector to remain healthy over the intermediate-term as Americans’ net worth makes new record highs, interest rates remain low, inflation decelerates further, housing fears subside, stocks continue making record highs, wages continue to substantially outpace inflation and unemployment remains historically low.

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