Today's Headlines

Bloomberg:
- JPMorgan(JPM), Lehman Brothers(LEH) and BNP Paribas SA say oil, wheat and metals traders are Wall Street’s hottest commodities.
- Metal and food prices will probably fall next year as supplies of the commodities increase, the IMF said.
- Apple Inc.(AAPL) will provide a development kit to let programmers create iPhone applications in February, in a bid to spur sales with new software such as games and a chat feature that the company doesn’t offer.
- The Fed said economic growth slowed since August in five of twelve regions, as consumer spending, manufacturing and service industries moderated.
- Democratic House Speaker Nancy Pelosi backed off her pledge to call a floor vote on a measure declaring the World War I-era killings of Armenians by Ottoman Turks an act of genocide after support for the resolution eroded.
- Crude oil rose to a record $89/bbl. in NY after Turkish lawmakers voted to allow the use of military force against Kurdish rebels in northern Iraq.

NY Observer:
- Murdoch’s Wall Street Journal Sets Sights on New York Times(NYT).

Reuters:
- President Bush’s job-approval rating sank to 24% this month, while Congress’s fell to 11%, according to a Reuters/Zogby poll release today.

Consumer Inflation Below Average, Housing Starts Fall

- The Consumer Price Index for September rose .3% versus estimates of a .2% gain and a -.1% decline in August.

- The CPI Ex Food and Energy for September rose .2% versus estimates of a .2% increase and a .2% gain in August.

- Housing Starts for September fell to 1191K versus estimates of 1280K and 1327K in August.

- Building Permits for September fell to 1226K versus estimates of 1285K and 1322K in August.

BOTTOM LINE: Prices paid by US consumers rose more than forecast in September, while the core measure showed inflation remains contained, Bloomberg reported. With inflation under control, the Fed has the leeway to cut the fed funds rate if necessary at the upcoming meeting later this month. The CPI is now rising at a 2.8% rate year-over-year versus the long-term average of 3.1%. As well, the core CPI is rising at a 2.1% rate, well below the long-term average of 3.0%. I continue to believe inflation has peaked for this cycle and that the secular trend of disinflation will eventually re-assert itself.

Housing starts in the US dropped more than forecast to a 14-year low in September, Bloomberg reported. Starts fell 28% in the Midwest, 12% in the South and 10% in the West. Starts jumped 45% in the Northeast. I continue view the decline in home construction as a positive as builders work down excessive inventories. Residential construction will likely remain weak through next year.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Tiger Woods and PepsiCo’s(PEP) Gatorade unit will develop a line of drinks to be introduced in March, led by a signature brand for the world’s top-ranked golfer. The first product will be called Gatorade Tiger.
- Stahlman of Gartner Says Technology Stocks to ‘Take Off’: Video.
- This year’s accelerating gains in food prices will slow to normal rates of growth in 2008 as farmers increase production of crops such as corn and wheat, Acting US Agriculture Secretary Chuck Conner said.
- Japan’s economic growth may falter because changes to building rules requiring stricter inspections will cause housing starts to slump, analysts said.

Wall Street Journal:
- One in seven hedge-fund managers expect to raise capital in the next two years either through a flotation or the sale of a stake in their firm, before falling fee scales and rising costs squeeze some of them out of business, according to an Ernst & Young survey.
- Disney’s(DIS) $1 Billion Adventure. Planned Five-Year Revamp of Its California-Themed Park Aims to Boost Attendance by Mirroring Neighbor Disneyland.
- As much as 20% of the audience for television’s most popular shows are skipping the commercials.

AP:
- A House vote to label the century-old deaths of Armenians as genocide was in jeopardy Tuesday after several Democrats withdrew support and sounded alarms it could cripple US relations with Turkey. The loss of support is a major setback to Democratic House Speaker Nancy Pelosi and other Democratic leaders on Capitol Hill, who have fiercely defended the resolution to Republicans and the Bush administration as a moral imperative in condemning the World War I-era killings of up to 1.5 million Armenians by Ottoman Turks.

MarketWatch.com:
- Delta(DAL) could take role in airline mergers, CEO says.

IBD:
- Congress’ foolish move to declare the massacre of Armenians by the Ottoman Empire a genocide will have an impact far beyond politics. It affects you – both in your pocketbook and in your security.

Reuters:
- Apple’s(AAPL) new operating system to hit stores October 26.

Financial Times:
- Chinese companies are set to be Asia’s most acquisitive in the US or Europe next year, according to a survey of the region’s dealmakers.
- Tata Consultancy Services plans to open two computer services centres in the US in one of the biggest expansions by an Indian information technology outsourcing company in a developed market.
- Toyota received another black eye in North America when Consumer Reports, an influential consumer-advice publication, said its vehicles’ reliability had slipped to the point where its new models can no longer be recommended without owners’ feedback.

TimesOnline:
- The most extraordinary spectacle of the past week has been the apparent desire of the US Congress to pronounce as genocide the 1915 massacre of Armenians by Turks, even though there is nothing more provocative to Turkey, and no worse time at which to do it.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (DPZ), target $20.

Night Trading
Asian Indices are -1.0% to unch. on average.
S&P 500 futures +.32%.
NASDAQ 100 futures +.57%.

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Earnings of Note
Company/EPS Estimate
- (AMR)/.75
- (ABT)/.66
- (BLK)/1.90
- (CIT)/1.23
- (CMA)/1.22
- (KO)/.68
- (GCI)/1.00
- (MAN)/1.39
- (MTG)/.61
- (MI)/.83
- (PJC)/.50
- (UTX)/1.16
- (MO)/1.14
- (JPM)/.90
- (ITW)/.87
- (SYK)/.55
- (TER)/.18
- (ALL)/1.70
- (CTXS)/.38
- (ETFC)/.11
- (EBAY)/.33
- (RX)/.40
- (KNX)/.19
- (NE)/1.17
- (WM)/.23
- (BOT)/1.18
- (GRB)/.10
- (KMP)/.42

Upcoming Splits
- (DKS) 2-for-1

Economic Releases
8:30 am EST
- The Consumer Price Index for September is estimated to rise .2% versus a -.1% decline in August.
- The CPI Ex Food & Energy for September is estimated to rise .2% versus a .2% increase in August.
- Housing Starts for September are estimated to fall to 1280K versus 1331K in August.
- Building Permits for September are estimated to fall to 1285K versus 1322K in August.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil build of 1,050,000 barrels versus a -1,674,000 barrel drawdown the prior week. Gasoline supplies are expected to rise by 400,000 barrels versus a 1,675,000 barrel build the prior week. Distillate inventories are estimated to fall by -750,000 barrels versus a -563,000 barrel decline the prior week. Finally, Refinery Utilization is estimated to fall -.25% versus a .33% increase the prior week.

2:00 pm EST
- Fed’s Beige Book

Other Potential Market Movers
- The Fed’s Beige Book report, Fed’s Hoenig speaking, weekly EIA energy inventory report, weekly MBA Mortgage Application report, Bear Stearns Retail Outing and Wachovia Consumer Growth Conference could also impact trading today.

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

Stocks Finish Lower on Rising Energy Prices, Housing Worries

Indices
S&P 500 1,538.53 -.66%
DJIA 13,912.94 -.51%
NASDAQ 2,763.91 -.58%
Russell 2000 823.35 -.72%
Wilshire 5000 15,480.26 -.66%
Russell 1000 Growth 627.06 -.48%
Russell 1000 Value 854.22 -.89%
Morgan Stanley Consumer 743.12 -.32%
Morgan Stanley Cyclical 1,067.53 -1.03%
Morgan Stanley Technology 672.36 -1.42%
Transports 4,833.35 -1.14%
Utilities 512.89 -.23%
MSCI Emerging Markets 154.82 -2.17%

Sentiment/Internals
Total Put/Call .94 +17.5%
NYSE Arms 1.30 +10.7%
Volatility(VIX) 20.02 +4.0%
ISE Sentiment 121.0 -20.92%

Futures Spot Prices
Crude Oil $87.42 +1.50%
Reformulated Gasoline 217.20 +.67%
Natural Gas 7.37 -.98%
Heating Oil 233.75 +1.31%
Gold 764.60 +.31%
Base Metals 252.23 -2.47%
Copper 363.75 -1.32%

Economy
10-year US Treasury Yield 4.64% -3 basis points
US Dollar 78.23 +.19%
CRB Index 339.33 +.35%

Leading Sectors
Computer Services +.83%
Restaurants +.68%
Semis +.51%

Lagging Sectors
Coal -1.85%
Banks -2.11%
Homebuilders -2.16%

Evening Review
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Afternoon Recommendations
Bear Stearns:
- Rated (GME) Outperform, target $74.
- Rated (ANSS) Outperform, target $45.

Deutsche Bank:
- Upgraded (X) to Buy.

Oppenheimer:
- Rated (IVC) Buy, target $30.

Afternoon/Evening Headlines
Bloomberg:
- Intel Corp.(INTC), the world’s largest semiconductor maker, said profit rose 43% on higher demand for personal computers in Europe and Asia. The company forecast sales that beat estimates, sending the shares 5.7% higher in after-hours trading.
- Yahoo!(YHOO) reported third-quarter results that beat analysts’ estimates, signaling that acquisitions and new advertising software may be spurring growth. The shares jumped 10% in extended trading.
- Research In Motion(RIMM), maker of the BlackBerry e-mail phone, will see a rush of holiday sales this season as more consumers buy the devices, Co-CEO Balsillie said.
- IBM(IBM), the biggest computer-services company, said third-quarter profit rose 6.3% on new contracts and software sales.
- Bristol-Myers Squibb(BMY) won US approval for a drug to treat the most advanced form of breast cancer, the first new type of chemotherapy for the disease in 14 years. The stock rose 2.5% in after-hours trading.

BOTTOM LINE: The Portfolio finished about even today as losses in my Software longs and Medical longs offset gains in my Biotech longs, Computer longs and Semi longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was negative today as the advance/decline line finished lower, sector performance was mostly negative and volume was about average. Measures of investor anxiety were above average into the close. Today's overall market action was mildly bearish. Growth stocks have been outperforming value stocks in both up and down markets, and the same was the case today. Hundreds of stocks I monitor posted gains or just slight losses today, notwithstanding the major averages. Weakness was the most severe in the homebuilders and financials. Semi, energy, restaurant, computer service and defense stocks were sources of strength. Given the headlines today, today's losses and breadth weren't too bad. The NYSE Arms ran above 1.3 most of the day, yet the bears were unable to gain significant traction. This bodes well for gains tomorrow, especially given the earnings announcements in tech after the close today.

Stocks Lower into Final Hour on Higher Energy Prices, Housing Worries

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Medical longs and Software longs. I covered my (IWM)/(QQQQ) hedges and some of my (EEM) short 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 falling and volume is about average. The U.S. Dollar Index is actually 0.22% higher despite Bernanke’s comments last night and the large outflows seen in the TIC data. I still expect a countertrend rally in the dollar beginning at any time. The 10-year yield is at session lows, falling 4 basis points. Thirty-day asset-backed commercial paper yields are falling another 8 basis points, to 5.12%. This is down 121 basis points from September highs. Weekly retail sales rose 2.6% this week, up from 2.0% the prior week and up from 1.4% in early July. I still see little evidence of a significant slowdown in consumer spending. Growth stock leaders are again outperforming the broad market today. Apple (AAPL) is rising 1.4% after saying it will release its Leopard operating system on Oct. 26. As well, BusinessWeek reports that Apple (AAPL) may announce in January that it is unlocking the iPhone, which will allow programmers to create applications for the device. This should be another driver of demand for the product, especially among the younger set. Piper Jaffray also made positive comments earlier today regarding Apple's upcoming earnings release, saying they could do EPS of 94 cents, 10 cents above consensus and near Caris' Street high of 98 cents. I still think Apple could see an initial "sell the news" reaction on its earnings report given how much it has risen but that any weakness will remain muted and short term in nature. I would add to my long position on any unexpected substantial weakness. It remains my second largest long position behind Google (GOOG) and just ahead of Intuitive Surgical (ISRG). Needham raised its target on Google (GOOG) to $690 and made the case for a stock split. I agree with that analysis and definitely think the stock should split. As I predicted a couple of days ago, Broadcom (BRCM) is starting to get some upgrades. Citi upgraded the shares this morning to buy, with a $52 target. I expect more upgrades soon. For the second day in a row, semis are outperforming tech and the broad market ahead of Intel's (INTC) earnings after the close. Yesterday, I said I thought there wasn't enough investor angst into the sell-off. We are getting higher levels of angst today. I expect earnings after the close to provide an upside catalyst for trading tomorrow. I expect US stocks to trade modestly higher into the close from current levels on bargain-hunting and short-covering.