Tuesday Watch

Late-Night Headlines
Bloomberg:
- The euro snapped five days of gains versus the dollar on speculation credit market losses at European financial companies will weaken the case for the central bank to raise interest rates.
- Japan’s unemployment rate unexpectedly rose for a second month and the Labor Ministry downgraded its assessment of the jobs market as hiring slowed.

Wall Street Journal:
- In a risky change of strategy, Democrats are pursuing a plan that would dare President Bush to veto a massive bill that combines spending for veterans care, education and the Pentagon.
- Google Inc.(GOOG) is about to unveil a plan to change the way the mobile-phone industry works.

New York Times:
- GM(GM) to Build Hybrid Research Center in China.

BusinessWeek.com:
- Time to Buy Financial Stocks?
- Electronic Arts(ERTS) 2.0. The games giant has spent $860 million on recent deals, heralding a shit in strategy and potentially building a new innovation engine for itself.
- Apple, Google vs. Big Wireless. The tech giants’ mobile software efforts could give developers the long-awaited upper hand over cellular carriers – and even Symbian and Microsoft.

USA Today.com:
- Tribune, Gannett team to expand city-focused websites.

TimesOnline:
- Google’s(GOOG) advertising revenue overtook that of ITV Plc’s ITV1, the UK’s top commercial television channel, for the first time, citing its analysis of Google’s third-quarter results.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (NKE), target $67.

CSFB:
- Reiterated Outperform on (VZ), target raised to $52.

Night Trading
Asian Indices are -.50% to +.25% on average.
S&P 500 futures -.21%.
NASDAQ 100 futures -.12%.

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Earnings of Note
Company/EPS Estimate
- (ADP)/.43
- (BEAV)/.41
- (BEC)/.75
- (CRDN)/1.36
- (CPO)/.67
- (FPL)/1.22
- (IT)/.11
- (IVC)/.32
- (JAH)/.69
- (LIZ)/.70
- (ONNN)/.22
- (PMI)/-1.05
- (STE)/1.26
- (TKLC)/.12
- (TEN)/.39
- (X)/2.66
- (VSH)/.26
- (RRD)/.74
- (BJS)/.61
- (CL)/.85
- (MAS)/.45
- (PG)/.90
- (Q)/.16
- (SIRI)/-.08
- (TRW)/.25
- (UA)/.34
- (WEC)/.67
- (AVP)/.36
- (COCO)/.04
- (SAF)/1.53
- (GT)/.51
- (AXL)/.23
- (MGM)/.49
- (CMG)/.52
- (ANDW)/.18
- (DWA)/.43
- (EQR)/.04
- (FIC)/.41
- (LNC)/1.37
- (MCK)/.72
- (OMTR)/.05
- (SIRF)/.22
- (WYNN)/.60
- (AG)/.30
- (BWLD)/.26
- (CMC)/.92
- (ENR)/1.05
- (TIE)/.38
- (VNO)/.66

Upcoming Splits
- (MNRK) 6-for-5

Economic Releases
10:00 am EST
- Consumer Confidence for October is estimated to fall to 99.0 versus a reading of 99.8 in September.

Other Potential Market Movers
- The weekly retail sales reports, S&P/CaseShiller Home Price Index, (AKAM) analyst meeting, (ENZN) investor day, (VAR) investor meeting, (ECPG) investor day, (YUM) investor day and Johnson Rice Consumer Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by pharmaceutical 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 100% net long heading into the day.

Stocks Finish Higher on Short-Covering, Bargain-Hunting Ahead of Fed

Indices
S&P 500 1,540.98 +.37%
DJIA 13,870.26 +.46%
NASDAQ 2,817.44 +.47%
Russell 2000 821.72 +.04%
Wilshire 5000 15,503.68 +.37%
Russell 1000 Growth 633.57 +.57%
Russell 1000 Value 848.05 +.34%
Morgan Stanley Consumer 746.66 +.48%
Morgan Stanley Cyclical 1,061.30 +.66%
Morgan Stanley Technology 673.22 +.56%
Transports 4,844.51 -.46%
Utilities 526.41 +.73%
MSCI Emerging Markets 165.36 +2.19%

Sentiment/Internals
Total Put/Call .85 +4.94%
NYSE Arms .76 +31.80%
Volatility(VIX) 19.87 +1.58%
ISE Sentiment 191.0 +20.13%

Futures Spot Prices
Crude Oil $93.58 +1.86%
Reformulated Gasoline 232.75 +2.35%
Natural Gas 7.27 +.71%
Heating Oil 246.65 +1.40%
Gold 793.50 +.76%
Base Metals 249.99 +.44%
Copper 352.50 -.35%

Economy
10-year US Treasury Yield 4.38% -2 basis points
US Dollar 76.83 -.25%
CRB Index 349.43 +1.03%

Leading Sectors
Networking +2.14%
Construction +1.56%
Semis +1.39%

Lagging Sectors
Banks -.48%
REITs -.96%
HMOs -1.38%

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In Play

Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- NY-based Somerset Partners LLC paid $509 million for 450 Park Ave., the most ever paid for a US office tower on a per-square-foot basis.
- The yen weakened the most in three weeks against the dollar as global stocks rose, encouraging investors to take on riskier bets financed with loans in Japan.
- Bill Gross, manager of the world’s biggest bond fund, expects the Fed to lower benchmark interest rates to 3.5%.

Financial News:
- Allianz SE’s Pacific Investment Management, known as Pimco, has bought more than $5 billion in mortgage-backed securities for its clients, citing Pimco fund manager Bill Gross in an interview. Gross “would buy up to an additional $2 billion” in mortgage-backed securities in the coming weeks.

BOTTOM LINE: The Portfolio finished slightly higher today on gains in my Internet longs, Medical longs and Software longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was mildly positive today as the advance/decline line finished about even, 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 given the rise in oil and last week’s gains. Cyclicals and growth stocks outperformed throughout the day. Even as many pundits seem bent on talking us into recession, the odds of fourth-quarter U.S. growth turning negative are only 13%, according to Intrade.com. As well, as I posted earlier, third-quarter U.S. growth is estimated at 3.1%. This would be around trend and should boost overall economic sentiment a bit. The consumer confidence index, released tomorrow, will likely come in below estimates and could help pressure stocks modestly in the morning. However, near-term losses will likely remain mild ahead of Wednesday's Fed announcement. Strength could surface later in the day. Google (GOOG) quietly made another record high earlier in the day. I suspect the stock is beginning another meaningful push higher after a brief pause. I still don't think it is too late to buy the stock at current levels, and it remains my largest long position. Despite mild gains in the major averages and neutral breadth, there were many stocks on my monitor pages with 2% to 5% gains. This remains an excellent market for stockpicking. Overall, insider activity remains near levels normally associated with meaningful market bottoms, even as imminent recession predictions continue unabated. Here are some of the noteworthy insider buys over the last week.

• Thornbug Mortgage (TMA): 1,000,000 shares at $9.50
• First Horizon (FHN): 147,500 shares at $24.26
• General Electric (GE): 83,000 shares at $40.08
• DuPont Fabros Technology (DFT): 152,300 shares at $21.00
• SanDisk (SNDK): 50,000 shares at $40.76
• Smithfield Foods (SFD): 53,930 shares at $28.49
• MGIC Investment (MTG): 73,000 shares at $19.23
• Western Alliance Bancorp (WAL): 51,000 shares at $21.08
• Whirlpool (WHR): 10,000 shares at $84.33

Stocks Higher into Final Hour on Bargain-Hunting, Short-Covering

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Software longs, Internet longs and Medical longs. I covered my (IWM)/(QQQQ) hedges and added to a few of my lagging longs, including (BRCM) today, thus leaving the Portfolio 100% net long. The overall tone of the market is slightly positive today as the advance/decline line is neutral, most sectors are rising and volume is around average. The U.S.-based three-month Libor rate is falling another 2 basis points and has plunged 77 basis points from its September highs. It is also the lowest since March 2006. The Semiconductor Industry Association said global chip sales rose 5.9% in September as demand for PCs and cell phones increased. It also said NAND flash revenue rose 58.5% in September from year ago levels. Analyst downgrades are again today running around 2-1 over upgrades. Optimism in the Wall Street research community continues to fade as it has for the last seven years. According to Zacks, the median year-over-year growth rate for S&P 500 third-quarter reported earnings has climbed to 10.6% over the last few days. Like last week, I expect most earnings reports over the next couple of weeks to be more of a positive market catalyst. Fed fund futures now imply a 98% chance for a 25-basis-point fed funds rate cut on Wednesday. This is up from 86% last Friday and 92% one week ago. The odds for no change in rates are 2%, up from 0% last Friday and down from 14% one week ago. I expect the Fed to cut its benchmark interest rate by 25 basis points. S&P 500 futures traders are still positioned near historically net short levels, and there are still many indicators registering extraordinary bearishness given the S&P 500 is just 1.9% off its record high set less than three weeks ago. There remains massive bull firepower on the sidelines. The Philadelphia Stock Exchange Semiconductor Sector Index (SOX) is very oversold technically. I also see the recent decline as excessive given my view of improving fundamentals for the group over the intermediate term. A bounce in the semis could spur further gains in the broad tech sector and help left the entire market. Advance third-quarter GDP, which is released on Wednesday, is expected to come in at 3.1%. Considering how many pundits and analysts said we were plunging into recession in August, a number around 3% should give a psychological boost to investors. I still expect U.S. GDP growth to come in modestly below trend, around 2.0% to 2.5%, over the intermediate term as the significant drag from U.S. housing is mostly offset by booming global growth. I expect US stocks to trade mixed-to-higher into the close from current levels on bargain-hunting and short-covering.

Today's Headlines

Bloomberg:
- Lehman Brothers(LEH) set up a $3 billion fund to invest in leveraged loans that banks are selling at a discount.
- Democratic senators Hillary Rodham Clinton and Barack Obama are in a statistical tie in Iowa among the party’s likely caucus-goers, a University of Iowa poll found.
- Crude oil climbed above $93/bbl. in NY for the first time after Mexico shut a fifth of its production and the dollar declined against he euro.

Wall Street Journal:
- A divide is emerging on the presidential trail over battling terrorists: how exactly to label the fight.
- CEO Search File: Merrill.
- US public pension funds are starting to pay their managers better as they take on complicated investments such as hedge funds and leveraged-buyout funds.

NY Times:
- SAP Ex-Executive Plans Electric-Car Battery Stations.

Economic Releases

- None of note

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