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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Deutsche Bank AG analyst Mike Mayo said he has become more positive on the prospects for the banking business as banks reported better-than-expected second quarter earnings without raising new capital. Mayo upgraded Citigroup Inc. to ``hold'' from ``sell'' and reiterated his ``buy'' rating on Wachovia Corp. He's become less ``negative'' as banks report second-quarter results without raising fresh capital, margins better than expected and ``problems have not spread as much as feared,'' he wrote in a note to clients today.
- The cost of protecting Japanese and Australian corporate bonds from default declined, according to traders of credit-default swaps. The Markit iTraxx Japan index fell 9 basis points to 122 as of 9:05 am in Tokyo, according to Morgan Stanley. The Markit iTraxx Australia index fell 11.5 basis points to 132.5, Citigroup prices show. The Markit iTraxx Asia index of 20 high-risk, high-yield borrowers outside Japan, including the Philippine government and India's Tata Motors Ltd., fell 18.5 basis points to 521.5 as of 9 a.m. in Hong Kong, according to ICAP Plc. The region's benchmark of 50 investment-grade borrowers, including the Thai government and Hong Kong conglomerate Hutchison Whampoa Ltd., declined 12 to 132.5.
- Donald Straszheim, vice chairman of Roth Capital Partners, says global stocks are in a ‘bottoming process’ and commodity prices will ‘stall out’ or ‘fall’. (video)
- Nickel prices may plunge as much as 46 percent this year as steelmakers increase production of low-nickel content products, said Jindal Stainless Ltd., India's largest stainless steel producer. The metal is headed for a second straight annual drop, after last year's 21 percent decline as stainless-steel mills resorted to products containing less nickel. The use of nickel in making stainless steel may fall 9.5 percent this year, metals research firm Heinz H. Pariser said July 9. Last year, global nickel production was 1.43 million tons, compared with demand of 1.33 million tons, said Adam Rowley, an analyst at Macquarie Group Ltd. in London. China accounts for a quarter of the global demand, he said.
- Sugar fell for a fifth straight session, its longest decline in two months, as a drop in the price of crude oil renewed speculation that demand will slow for fuel made from sugar cane. Sugar has dropped 14 percent in the past week, a decline Streible blames on banks selling investments to raise money after mortgage-related losses. ``Financial companies needed to raise capital and they were selling some of their investments like natural gas and sugar and crude,'' he said.
- Former U.S. Secretary of State Henry Kissinger said the biggest danger to Iraq would be to set a schedule for the withdrawal of American troops.
- Crude oil was little changed near a six-week low after falling more than $3 a barrel yesterday on forecasts a Gulf of Mexico hurricane will miss fields and as the dollar rebounded against the euro, reducing commodities' appeal. The number of outstanding oil futures in New York dropped to the lowest in 17 months as oil companies, refiners and institutional investors exited the market. Open interest fell 2.6 percent July 21 to 1.23 million contracts on the Nymex, according to data from the exchange.
- U.S. lawmakers reached agreement on a rescue plan for Fannie Mae(FNM) and Freddie Mac(FRE) that the House may vote on tomorrow, Representative Barney Frank said.
- Japan, the world's largest grain importer, plans to boost production of rice for feed and flour, as part of a strategy to reduce corn and wheat imports. The country wants to become less dependent on overseas grain supplies to protect it from soaring international prices and ensure long-term security of supply, Yuji Sawa, vice minister of Agriculture, Forestry and Fisheries, said in an interview.
- Australian inflation accelerated in the second quarter to the fastest pace in two years, adding to pressure on the central bank to leave borrowing costs at a 12- year high.
- Mexico's central bank Governor Guillermo Ortiz said inflation at the fastest in more than three years is still under pressure even as food and energy prices ease.
- Nissan Motor Co., planning to offer electric cars in the U.S. as early as 2010, said Tennessee and its main electric utility may set up charging stations to promote use of non-polluting vehicles.
- Intuitive Surgical(ISRG) climbed 11% to $312 in after-hours trading. The maker of a robot to aid in surgery said in a statement on Prime Newswire that second-quarter profit increased 67 percent, more than analysts expected, on higher sales of the machine and its related equipment.
- Illumina Inc.(ILMN), maker of a machine that analyses genes, raised its 2008 forecast after reporting a 66 percent gain in profit on sales of equipment to study DNA. Second-quarter net income rose to $15.4 million, or 23 cents a share, from $9.3 million, or 16 cents, San Diego-based Illumina said today in a statement. Revenue jumped 66 percent to $140.2 million. Results beat analysts' estimates by 15 cents. Illumina rose $7.90, or 9.4 percent, to $92 at 4:09 p.m. New York time in extended trading after the close of the Nasdaq Stock Market. The company today also announced a two-for-one stock split.
- VMware Inc.(VMW), the biggest maker of software that lets computers run multiple operating systems, cut its annual sales forecast amid competition from Microsoft Corp.(MSFT) and slowing technology spending.
- Broadcom Corp.(BRCM), the maker of chips for Nintendo Co.'s Wii video-game console, said profit jumped almost fourfold on higher sales of wireless chips. Expenses will rise this period, the company said, sending the shares lower.
- Yahoo! Inc.(YHOO), the Internet company that added activist investor Carl Icahn to its board yesterday, posted an 18 percent drop in second-quarter profit after spending more on developing new projects.
- Washington Mutual Inc.(WM), the biggest U.S. savings and loan, reported a $3.3 billion second-quarter loss on uncollectible loans as a record number of borrowers were unable to keep up with mortgage payments.
- Brazil's central bank will probably raise its interest rate for a third consecutive meeting today to slow inflation from a 2 1/2-year high.

Wall Street Journal:
- Three votes have now been cast in the Federal Communications Commission's review of the XM Satellite Radio Holdings Inc. and Sirius Satellite Radio Inc. merger, but the deal is still no closer to being done.
- Apple Inc.(AAPL) is ramping up its retail strategy in China after years of shying from one of the world's fastest-growing technology markets.
- Despite the rally in banks stocks, struggling banks are still trying to raise capital, and some of the hardest hit are now considering selling their lucrative money-management units to raise cash.

MarketWatch.com:
- Reading the VLMAP. An obscure market-timing indicator has turned positive.
- Schwab(SCHW) taps new CEO, hikes dividend.

NY Times:
- Food and Gas Prices Taking a Toll in Asia. While prices have been rising in the United States and Europe, the biggest increases are being felt in Asia, and countries like India and Vietnam are already having to deal with double-digit inflation. Sharp rises in global food and oil prices are now spilling over into wages and broader measures of inflation across Asia, as the Asian Development Bank noted in a report released Tuesday. “The epicenter of the inflationary storm is really in Asia,” said Cyd Tuano-Amador, the managing director of monetary policy at the Philippines Central Bank. In an interview Tuesday, Boediono, the governor of the Bank of Indonesia, called for a coordinated international move toward tighter monetary policy, including higher interest rates by the United States, so as to slow inflation. World oil prices could fall by 30 percent if countries took coordinated action to reduce liquidity, he said. He attributed much of the recent rise in global commodity prices to excess money in circulation.
- A federal appeals court Tuesday agreed with a lower court ruling that struck down as unconstitutional a 1998 law intended to protect children from sexual material and other objectionable content on the Internet. The decision by the 3rd U.S. Circuit Court of Appeals in Philadelphia is the latest twist in a decade-long legal battle over the Child Online Protection Act. The fight has already reached the Supreme Court and could be headed back there.

BusinessWeek.com:
- After the earnings call last night I talked with a source who is close to Apple and who who has in the past proven very well informed on the concerns of Apple senior management. This source told me with near-certainty that Jobs’ cancer has not returned.

Forbes.com:
- The U.S. government can't really regulate living hedge funds, but it's looking at a way to oversee dying ones. On Tuesday, Treasury Secretary Hank Paulson said that in cases of insolvency, he wanted "additional powers to manage the resolution, or wind-down, of large nondepository financial institutions, such as larger hedge funds, so as to limit the impact of a failure on the broader financial system."

CNNMoney.com:
- What’s Google(GOOG) News worth? $100 million.

USA Today.com:
- The drop in oil prices Tuesday offered further evidence that investors who only a week and a half ago drove prices to a new high above $147 a barrel are now quickly pulling money out of the market. It was also a reminder that the lack of major news can push the market down in the same way that incremental supply concerns previously pushed prices sharply higher. "This is more of the long exit from the market by the hedge funds," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates. "A lot of these investors who have been supporting prices are hitting the road." "Most people I knew were looking for a stronger price rally," Ritterbusch said. "When we can't muster up much steam," he added, large investors dump bets that prices will rise because they sense there is little support for sustained gains. In its weekly pump spending survey, MasterCard found U.S. gasoline demand dropped last week for the thirteenth week in a row. Demand fell 3.3% compared with the same week a year earlier, according to the survey. Since the start of 2008, gasoline demand is down 2.2%.

Reuters:
- SemGroup LP declared bankruptcy on Tuesday after $3.2 billion in oil trading losses torpedoed the formerly 12th-largest private U.S. company. The Tulsa-based company racked up the massive losses as oil prices ran up record gains, undercutting short crude futures positions SemGroup bought to hedge against its 500,000 barrel-per-day trading business. To meet obligations, SemGroup plans to sell off oil and natural gas gathering, transportation, and storage assets worth an estimated $6.14 billion that were purchased in a whirlwind of acquisitions since it was founded in 2000.
- Awareness is low, but 63 percent of those who had a view on it favor a California ballot measure that would require half the state's electricity to come from renewable sources by 2025, a Field poll issued on Tuesday shows. Voter awareness of Proposition 7 on the November ballot is extremely low -- 82 percent of those interviewed said they did not know of the measure.
- The U.S. Senate on Tuesday voted overwhelmingly to open debate on a bill to rein in energy market speculation blamed for high oil and gasoline prices. But final passage of the legislation looked difficult because of disagreements between its Democratic backers and Republicans who want to include other provisions designed to boost domestic oil production.

Financial Times:
- General Electric(GE) has joined the growing procession of US companies seeking solace from their domestic problems in the Middle East. But unlike Citigroup (C) , Merrill Lynch(MER) and the other troubled banks that headed east to ask for billions of dollars in rescue funds, GE is trying to harness its geographical and product reach to increase its exposure to the fast-expanding region.That is why GE's deal with Mubadala, Abu Dhabi's state investment vehicle, is both far-reaching and potentially controversial. In a US presidential year, the sight of a Middle Eastern investment fund buying up shares in a US corporate bellwether such as GE might cause a political backlash. Mr Immelt brushed away such suggestions on Monday, saying the partnership "was all about business". Over the past few years, Mr Immelt and his lieutenants have worked hard to build relationships in the region, in an effort to increase sales of GE's infrastructure such as oil and gas equipment, and other manufacturing products.

Australian Review:
- The number of Australians who spend more than half their income repaying their mortgage has more than doubled the past year, citing a survey. A quarter of people use more than half their income on repayments, know as ‘mortgage stress’, compared with 12% a year ago, citing a survey for Genworth Financial by Retail Financial Intelligence.

Nikkei:
- Toyota Motor’s(TM) first-half sales fell 7% in North America and Europe because of soaring gasoline costs, citing an unidentified company official. In China, first-half sales rose 34% to 285,000 vehicles, below the projected 40% increase.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (UNH), target $35.
- Reiterated Buy on (CSGS), raised estimates, target $19.50.
- Reiterated Buy on (CAT), target $106.
- Reiterated Buy on (STLD), raised estimates, boosted target to $44.

Night Trading
Asian Indices are +.25% to +2.25% on average.
S&P 500 futures +.02%.
NASDAQ 100 futures +.01%.

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Earnings of Note
Company/EPS Estimate
- (APD)/1.31
- (ATI)/1.54
- (TRV)/1.46
- (EMC)/.18
- (GD)/1.44
- (NWA)/-.50
- (MCD)/.85
- (EXC)/1.01
- (PX)/1.046
- (R)/1.16
- (ETH)/.44
- (HSY)/.28
- (BTU)/.59
- (GENZ)/.97
- (WLP)/1.36
- (WHR)/1.43
- (PFCB)/.32
- (PM)/.83
- (WYE)/.86
- (BA)/1.22
- (T)/.76
- (COP)/3.48
- (FFIV)/.22
- (RHI)/.42
- (QCOM)/.54
- (MCK)/.80
- (CMG)/.75
- (ALL)/1.30
- (NE)/1.31
- (OSIP)/.51
- (VAR)/.46
- (TEX)/2.02
- (KNX)/.15
- (WFR)/1.01
- (RYL)/-.79
- (AMZN)/.26
- (AFL)/1.00
- (PHM)/-.97
- (BUD)/.93
- (SY)/.43

Upcoming Splits
- None of note

Economic Releases
10:35 am EST
- Bloomberg consensus estimates call for a weekly crude oil drawdown of -600,000 barrels versus a +2,952,000 barrel increase the prior week. Gasoline supplies are expected to rise by +200,000 barrels versus a +2,472,000 barrel increase the prior week. Distillate inventories are estimated to rise by +2,500,000 barrels versus a +3,189,000 barrel increase the prior week. Finally, Refinery Utilization is expected unch. versus a +.33% increase the prior week.

2:00 pm EST
- The Fed’s Beige Book.

Other Potential Market Movers
- The Fed’s Kohn speaking, Fed’s Mishkin speaking and weekly MBA mortgage applications report could also impact trading today.

BOTTOM LINE: Asian indices are higher, boosted by financial and transportation shares 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 at Session Highs, Boosted by Financial, Airline, Gaming, Homebuilding, Networking and Retail Shares

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In Play

Stocks Higher into Final Hour on Falling Oil, Short-Covering, Diminishing Credit Angst, Less Financial Sector Pessimism

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Biotech longs, Gaming longs, Retail longs and Commodity shorts. I covered all my (IWM)/(QQQQ) hedges, added to my (AAPL) long and covered some of my (EEM) short today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, sector performance is mostly positive and volume is above average. Investor anxiety is about average. Today’s overall market action is mildly bullish. The VIX is falling 2.86% and is still above-average at 22.39. The ISE Sentiment Index is about average at 151.0 and the total put/call is around average at .91. Finally, the NYSE Arms has been running high most of the day and is currently 1.22. The Euro Financial Sector Credit Default Swap Index is rising .68% today to 83.56 basis points. This index is up from a low of 52.66 on May 5^th, but down from 129.46 basis points on March 20^th. The North American Investment Grade Credit Default Swap Index is -1.0% today at 137.0 basis points. The TED spread is falling 6.94% to 1.28. The 10-year TIPS spread, a good gauge of inflation expectations, has dropped 24 basis points in 11 days to 2.40% on the fall in commodities. Considering the earnings disappointments yesterday after the close, today’s action is even more bullish. Financials continue to trade very well, notwithstanding recent gains, as evidenced by Wachovia’s(WB) 10% jump on its poor report. The (XLF) is 3.04% higher on the day. The (XLF) is up 23.7% in 7 days. Oil continues to trade poorly and now the US dollar appears to be beginning another surge. The Transport Index is soaring 3.3% on crude’s decline and is now back above its 50-day moving average. Moreover, the S&P Goldman Ag Spot Price Index is falling another 1.0% today and is now slightly below its 200-day moving-average. The last time this index broke down through this technical level in a convincing way was June 2004. I continue to see much more upside for the broad US stock market if in fact the commodity bubble is finally bursting. Apple(AAPL) is falling 5% today after investors were disappointed with its guidance. I suspect today will mark an excellent entry point for both short and long-term investors in the shares. I still see significant upside in Apple from current levels. Weekly retail sales rose 2.7% this week. This is the best level since September 2007, despite record gas prices and the diminishing effects of the stimulus checks. Retail sales should move back above long-term average levels over the intermediate-term as gas prices fall. Nikkei futures indicate an +100 open in Japan and DAX futures indicate an +50 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, diminishing credit market angst, short-covering, bargain-hunting and less financial sector pessimism.

Today's Headlines

Bloomberg:
- The cost of protecting U.S. corporate bonds from default fell as crude oil prices dropped to a more than six-week low and Wachovia Corp. slashed its stock dividend and said it may sell assets to shore up capital. Credit-default swaps on the Markit CDX North America Investment Grade Index, a benchmark gauge of credit risk tied to the bonds of 125 companies in the U.S. and Canada, fell 3 basis points to 136.5 basis points as of 11:38 a.m. in New York, according to broker Phoenix Partners Group.
- Crude oil fell more than $4 a barrel, dropping to a six week low, on forecasts a tropical storm in the Gulf of Mexico will miss oil fields and refineries and a .68% surge in the US dollar.
- Corn fell below $6 a bushel for the first time in seven weeks on speculation falling energy costs will diminish the appeal of commodities as a hedge against inflation. ``Crude oil is driving speculators and investors to dump all commodity positions,'' said Chad Henderson, a market analyst for Prime Agricultural Consultants Inc. in Brookfield, Wisconsin. ``Grains are following crude oil.''
- Wachovia Corp.(WB) Chief Executive Officer Robert Steel plans to cut $2 billion of expenses by the end of next year and sell parts of the fourth-biggest U.S. bank after posting a record quarterly loss, slashing the dividend 87 percent and eliminating 6,350 jobs.
- United Airlines parent UAL Corp(UAUA) rose the most since leaving bankruptcy two years ago after saying it will cut 7,000 jobs and free up cash under a new credit-card agreement with JPMorgan Chase & Co.(JPM).
- Bayerische Motoren Werke AG, the world's largest maker of luxury autos, plans to offer battery- powered Mini cars in the U.S. by mid-2009 to meet demand for fuel-efficient vehicles. ``There will be electric Minis driven by real customers a year from now,'' Jim McDowell, chief of the Mini brand in North America, said at an event today in Birmingham, Michigan.
- Caterpillar Inc.(CAT), the world's largest maker of earthmoving equipment, said second-quarter profit climbed 34 percent, exceeding analysts' estimates, on demand for backhoes and mining tools in China and the Middle East.
- General Electric Co.(GE), turning to sovereign wealth as it exits U.S. consumer financing, formed an $8 billion venture with Abu Dhabi's Mubadala Development Co. to profit from commercial investments in the Middle East and Africa. State-owned Mubadala also said it wants to become a top 10 holder in Fairfield, Connecticut-based GE, whose shares have lost about a quarter of their value since April 11.
- Quest Diagnostics(DGX) Inc., the largest U.S. provider of medical tests, rose the most in three months in New York trading after reporting second-quarter profit that beat analysts' estimates.
- United Parcel Service Inc.(UPS), the world's largest package-delivery company, said second-quarter profit fell 21 percent as fuel costs rose and the cooling economy damped domestic shipments. Revenue rose 6.7 percent to $13 billion, Atlanta-based UPS said today in a statement. ``Although things remain very uncertain, the sky is not falling,'' said Dan Ortwerth, an analyst at Edward Jones & Co. in St. Louis.
- The US dollar rose the most against the euro in more than two weeks as Treasury Secretary Henry Paulson voiced support for the currency and the Federal Reserve Bank of Philadelphia president said interest rates should be raised.
- Federal Reserve Bank of Philadelphia Charles Plosser said the central bank should raise interest rates ``sooner rather than later'' to lower inflation and prevent price expectations from getting out of control.

Wall Street Journal:
- GM(GM) Teams With Dozens Of Utilities on Plug-In Cars. Collaboration Seeks To Smooth the Path For Electric Vehicles.
- The Federal Energy Regulatory Commission is moving forward with an investigation in which it has accused fallen hedge fund Amaranth Advisors of manipulating the natural-gas markets, the agency said Thursday.

NY Times:
- Videoconferencing Gains Favor as Travel Costs Rise.
- Product Placement Finds a New Home on TV News Set.

USA Today:
- Iraqi insurgents have nearly ceased their once constant attacks on US convoys, allowing shipments for reconstruction projects to reach their highest levels since the start of the war.

MacDailyNews:
- RUMOR: Apple’s(AAPL) secret product is ‘MacBook touch’.

La Stampa:
- Europe’s economic recovery may take longer than the ECB forecasts and could come after the fourth quarter, citing an interview with board member Lorenzo Bini Smaghi.

Interfax:
- The pace of Russia’s economic growth could be slowed by high inflation, citing Finance Minister Alexei Kudrin. Producer-price growth accelerated to 28.1% in June, a 3 ½ year high, the statistics service said yesterday. The annual inflation rate stood at 15.1% in June, the most since December 2002.

Estado de Sao Paulo:
- Republican presidential nominee John McCain said closer ties between the US and Brazil would offset the influence of Venezuelan President Hugo Chavez. McCain said he would support Brazil’s entry into the Group of Eight and his proposed “League of Democracies.” He also vowed to cut subsidies to US sugar producers and lower tariffs on Brazilian ethanol if elected.

Arab Times:
- Kuwaiti lawmakers Mohammed al-Obaid urged the government to take serious measures to curb “alarming” price rises in food and other commodities.

Jordan Times:
- Jordan’s inflation rate for the year is unlikely to fall below 14%, citing a report by First Strategieh Consulting. Inflation will slow down the economy and negatively impact employment and standards of living, citing Tayseer Smadi, the report’s author. Jordanian inflation accelerated to an annual 16.6% in June as the prices of food, housing, clothing and services increased following the government’s lifting of fuel subsidies, according to the government’s Dept. of Statistics.

Bear Radar

Style Underperformer:

Mid-cap Growth -1.19%

Sector Underperformers:

Coal irlind (-7.59%), Semis (-4.50%) and Energy (-2.70%)

Stocks Falling on Unusual Volume:

MICC, TXN, VOD, HES, TIE, GMXR, GDP, CSIQ, ARTC, SNDK, SIMO, NPBC, ALV, TLP, AMX and BSX

Stocks With Unusual Put Option Activity:

1) SPF 2) LUV 3) NSM 4) ITMN 5) BTU