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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Oil Price at $90 Is Enough to Save Global Economy. Oil at a more sustainable $80 to $90 a barrel would suddenly make the economic weather feel a lot sunnier. With inflation under control, central banks could cut interest rates again. Property markets would stabilize, helping banks to begin lending and to reinvigorate the global economy. Cheaper oil wouldn't necessarily be beneficial to everyone. We can be sure that many investment banks and hedge funds have speculated wildly in the oil market, and that some of them will make horrendous losses. Expect some shocks to emerge on the way down, just as they did on the way up. Likewise, a soaring oil price was helping the environment. The world needs to wean itself off its addiction to fossil fuels, and the markets certainly delivered an incentive to do that. Arguably, much of that work has now been done. You don't need $300-a-barrel oil to get people to trade in their gas-guzzling sport-utility vehicles.
- India's 10-year government bonds will tumble this year, boosting yields to the highest since 2001, as the central bank raises interest rates to curb inflation, according to JPMorgan Chase & Co. Yields may climb to 11 percent by the end of December as the central bank boosts rates from a seven-year high to slow the fastest inflation in 13 years, Vikas Agarwal, a strategist in Mumbai at the third-biggest U.S. bank, said. ``We haven't yet seen peaks in inflation, policy rates or bond yields in India,'' Agarwal said in an interview. ``Monetary-policy prospects remain decidedly hawkish.''
- The cost to protect Australian corporate bonds from default fell by the most in a week, credit- default swaps show. The Markit iTraxx Australia Series 9 Index declined 7.5 basis points to 131.5 basis points at 8:49 a.m. in Sydney, according to Citigroup Inc. prices.
- Hong Kong's apartment transactions may fall to a 10-month low in July, then drop further, on concerns that accelerating inflation and a slumping stock market may push prices down, analysts said.
- Wheat fell for a second straight day on speculation the biggest U.S. crop in a decade will overwhelm demand. Domestic growers may harvest 66.97 million metric tons (2.46 billion bushels), up 19 percent from last year and the most since 1998, the U.S. Department of Agriculture said on July 11. The nation's reserves before next year's harvest will soar 76 percent to 14.6 million tons. U.S. exports probably will decline as global production climbs, the agency said.
- Crude oil was little changed below $122 a barrel after closing at its lowest in 12 weeks yesterday because of a strengthening U.S. dollar and signs that gasoline demand may extend declines. Oil has dropped 17 percent since its July record as the rising dollar curbed the appeal of commodities as an inflation hedge. U.S. motorists drove less for a seventh consecutive month in May, as vehicle-miles traveled on all U.S. roads fell 3.7 percent during the month from a year earlier, the Federal Highway Administration said in a report July 28. The seven-month slide is the longest downward streak since 1979. ``This demand thing has some bite,'' said James Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois. ``I can really see a crude market here that could drop down to $100 by the end of summer or early fall.''
- The U.S. dollar may extend gains to C$1.0865 against the Canadian dollar should it close above so- called resistance at C$1.0340, said Kevin Edgeley, a technical analyst at Goldman Sachs Group Inc. in London.
- The Australian dollar fell to the lowest in three weeks as prices of commodities the nation exports declined and the U.S. currency rallied in New York.
- Winthrop Smith Jr., the former head of Merrill Lynch & Co.'s international brokerage unit, said he's buying the firm's shares again after Chief Executive Officer John Thain announced plans to shed risky assets and raise capital. Smith, who left the firm in 2001, sold all his shares before Thain took charge of the third-biggest U.S. securities firm last year, he said in a Bloomberg Television interview today.
- Traders who bought Merrill Lynch & Co. options yesterday betting the biggest U.S. brokerage would extend its worst slide in 21 years may have been tipped off, options analysts say. Merrill options rose to the highest in almost two weeks yesterday and traders increased bearish bets hours before the firm said that it would take $5.7 billion in writedowns.
- The International Monetary Fund urged the Bank of Japan to refrain from raising interest rates for now as the world's second-largest economy heads for a ``soft landing.''
- India's central bank put the battle against inflation before economic growth in Governor Yaga Venugopal Reddy's final interest-rate decision, spurring speculation of further increases in borrowing costs. The Reserve Bank of India yesterday raised its benchmark repurchase rate by half a percentage point to 9 percent, more than economists forecast. The rate will climb to between 9.25 percent and 9.5 percent in the next three months.
- Japan's industrial production fell last month after a global slowdown caused overseas shipments to decline for the first time in four years. Factory output dropped 2 percent from May, when it rose 2.8 percent, the Trade Ministry said today in Tokyo.
- An experimental Alzheimer's drug made by Wyeth(WYE) and Elan Corp.(ELN) only helped about half of patients in a study and was linked with a brain-swelling side effect. The company's shares fell 9.9 percent in after-market trading.
- Buffalo Wild Wings Inc.)BWLD), the restaurant chain specializing in multiflavored chicken wings, gained the most in 18 months in Nasdaq trading after saying it will meet its annual profit-growth forecast of 25 percent.
- MetLife Inc.(MET), the biggest U.S. life insurer, cut its full-year earnings forecast and said second- quarter profit declined 19 percent on investment losses, sending the shares down 9.1 percent.

Wall Street Journal:
- The Bush administration's embrace of a flexible timeline for pulling U.S. troops from Iraq has accelerated negotiations between Washington and Baghdad over a long-term security pact, officials from both sides said.

MarketWatch.com:
- Timers’ optimism may bode ill for gold. They don’t seem to be worried; that’s a bad sign to contrarians.
- Tight budgets or not, college students will spend more money on electronics in their back-to-school purchases this year than on apparel and apartment furnishings, underscoring the lofty place PCs, iPhones and other gadgets have taken on students' must-have lists.

NY Times:
- The number of chronically homeless people living in the nation’s streets and shelters has dropped by about 30 percent — from 175,914 to 123,833 — from 2005 to 2007. Researchers who study the issue say they believe the decline is the most significant in years.
- Amazon(AMZN) Offers Other Sites Use of Its Payment Service.
- An Investment Firm That Prospered From Past Crises Turns to Mortgages. John P. Grayken made a fortune buying investments no one else seemed to want during the savings and loan debacle in the early 1990s. Now he is trying to repeat that feat by buying the detritus of today’s mortgage crisis. On Monday night, Mr. Grayken’s private investment company, Lone Star Funds, agreed to pay $6.2 billion for most of the toxic, mortgage-linked investments held by Merrill Lynch.

BusinessWeek.com:
- Federal regulators on Tuesday extended through mid-August a temporary order banning a certain kind of short-selling of the stocks of mortgage finance companies Fannie Mae, Freddie Mac and 17 large investment banks. The Securities and Exchange Commission said the ban on so-called "naked" short selling will be in effect until 11:59 p.m. EDT on Aug. 12 and will not be extended. "In addition to continuing the existing order against naked short selling, the commission will continue exploring other remedies for the broader marketplace to further protect investors from 'distort and short' artists," Cox said in a statement. After ban runs out, regulators will move to draw up formal rules to provide additional protections against abusive naked short selling in the broader market, while allowing legitimate short selling, the SEC said.

LA Times:
- The International Olympic Committee ruled today that Iraq could participate in the Beijing Games, reversing itself after Baghdad pledged to ensure the independence of its national Olympics panel.

USA Today.com:
- An increasing number of top economists say the U.S. economy is likely to narrowly avoid a recession this year, according to a new quarterly survey by USA TODAY.

Washington Post:
- Olympic organizers are backtracking on another promise about coverage of the Beijing Games, keeping in place blocks on Internet sites in the Main Press Center and venues where reporters will work. The blocked sites will make it difficult for journalists to retrieve information, particularly on political and human rights stories the government dislikes.

San Jose Mercury News:
- The American Wind Energy Association is expected to release a survey next month that says the United States has become the world's leading wind producer, and that the industry expects rapid growth to continue in places like Texas, the Great Plains and California. The survey calculates that the U.S. wind industry now tops Germany in terms of how much energy is being produced from wind.

Reuters:
- China has installed Internet-spying equipment in all the major hotel chains serving the 2008 Summer Olympics, a U.S. senator charged on Tuesday. "The Chinese government has put in place a system to spy on and gather information about every guest at hotels where Olympic visitors are staying," said Sen. Sam Brownback. The U.S. senator made a similar charge a few months ago but said that since then, hotels have come forward with detailed information on the monitoring systems that have been required by Beijing. Brownback refused to identify the hotels, but said "several international hotel chains have confirmed the existence of this order."

The Australian:
- US conglomerate GE(GE) says it could sign a deal within months to build a $US3 billion ($3.13 billion) "clean coal" power plant in NSW or Queensland that would store carbon dioxide underground.

Straits Times:
- Rents in Singapore have begun to fall at most apartment projects because of new supply, citing data from the government.

Hong Kong Economic Journal:
- Hong Kong investors bought 29% fewer residential units in China during the first half, the first year-on-year decline since 2003, citing a report by a real estate agency. Shenzhen in the southern province of Guangdong was the worst-performing city, with prices falling 35% in the nine months from June last year.

Late Buy/Sell Recommendations
Citigroup:
- Maintained Buy on (TXN), target $36.
- Reiterated Buy on (HS), boosted estimates and raised target to $25.

Night Trading
Asian Indices are +1.0% to +2.0% on average.
S&P 500 futures -.03%.
NASDAQ 100 futures +.11%.

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Earnings of Note
Company/EPS Estimate
- (GLW)/.48
- (CMCSA)/.23
- (IT)/.22
- (IACI)/.31
- (STE)/.25
- (MCO)/.47
- (TIN)/-.05
- (TBL)/-.31
- (AMT)/.12
- (SO)/.56
- (SPW)/1.57
- (DIS)/.60
- (OII)/.90
- (HOLX)/.29
- (THQI)/-.38
- (SPF)/-1.49
- (ESRX)/.72
- (FSLR)/.56
- (OI)/1.22
- (CVD)/.78
- (ITRI)/.82
- (AVB)/1.24
- (GMR)/.56
- (PSYS)/.50
- (SBUX)/.18
- (CLF)/1.99
- (DRIV)/.33
- (V)/.49
- (FLS)/1.49
- (NBL)/2.05
- (ODP)/.00
- (SYMC)/.35
- (NLY)/.61
- (AKAM)/.41
- (AVP)/.45
- (AGN)/.63
- (SEE)/.40
- (CMI)/1.23
- (ENR)/1.27
- (IPG)/.16
- (JNY)/.13
- (MUR)/2.20
- (LVS)/.11
- (HES)/2.74
- (OC)/.21

Upcoming Splits
- None of note

Economic Releases
8:15 am EST
- The ADP Employment Change for July is estimated at -60K versus -79K in June.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil inventory drawdown of -1,300,000 barrels versus a -1,558,000 barrel decline the prior week. Gasoline supplies are expected to rise by 350,000 barrels versus a 2,847,000 barrel increase the prior week. Distillate inventories are estimated to rise by 2,050,000 barrels versus a 2,419,000 barrel increase the prior week. Finally, Refinery Utilization is expected unch. versus a -2.35% decline the prior week.

Other Potential Market Movers
- The weekly MBA mortgage applications report and the Keefe Bruyette Woods Community Bank Conference could also impact trading today.

BOTTOM LINE: Asian indices are higher, boosted by technology and transportation shares 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 at Session Highs, Boosted by Financial, Transport, Gaming, Retail, Homebuilding, REIT and Steel Shares

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In Play

Stocks Soaring into Final Hour on Falling Energy Prices, Less Financial Sector Pessimism, Short-Covering, Bargain-Hunting

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Computer longs, Medical longs, Alternative Energy longs, Biotech longs and Commodity shorts. I covered all my (IWM)/(QQQQ) hedges and some of my (EEM) short this morning, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is substantially higher, most sectors are rising and volume is below average. Investor anxiety is slightly above average. Today’s overall market action is very bullish. The VIX is falling 5.41% and is still above-average at 22.93. The ISE Sentiment Index is below-average at 131.0 and the total put/call is about average at .88. Finally, the NYSE Arms has been running around average most of the day and is currently .92. The Euro Financial Sector Credit Default Swap Index is falling 1.72% today to 77.58 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 -1.3% today to 134.22 basis points. The TED spread is falling 1.7% to 1.09. The euro is very close to breaking down through its intermediate-term uptrend line that has been in place since August of last year versus the US dollar. I suspect the euro will break this technical support over the coming days, which should further pressure commodities. A move towards the $1.50 level versus the euro is likely over the coming months, in my opinion. Much of the parabolic move higher in commodities over the last couple of years was a result of “investors,” such as pension funds, making a long-term decision to hedge against a perceived future inflation problem by pouring money into commodity index, commodity hedge and commodity exchange-traded funds. Since the bubble in commodities has been the main source of inflation fears, this became a vicious cycle. If inflation expectations continue to fall rapidly, as they have of late, a virtuous cycle could take hold, whereby less demand for inflation hedging products results in lower commodity prices, which then further lowers inflation expectations. This would be a major positive for the broad US stock market. Nikkei futures indicate an +181 open in Japan and DAX futures indicate an +47 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, diminishing credit angst, less financial sector pessimism, lower energy prices and bargain-hunting.

Today's Headlines

Bloomberg:
- The US dollar advanced to a one-month high versus the euro and the yen as U.S. consumer confidence increased and crude oil prices dropped, reducing concern the economy may fall into a recession. The currency rose earlier as Merrill Lynch & Co.'s plans to sell $8.5 billion of stock and liquidate bonds raised speculation Wall Street may have seen the worst of the credit crisis. The pound depreciated versus the dollar after an index of U.K. retail sales dropped in July to a 25-year low.
- Crude oil fell to a 12-week low as the U.S. dollar strengthened against the euro and on signs gasoline demand may extend declines. Oil has dropped 17 percent since its July record as the rising dollar curbed the appeal of commodities as an inflation hedge.
- Dealers including Lehman Brothers Holdings Inc.(LEH) are considering changing credit-default swap contracts to more closely resemble cash bonds, following pressure to reduce risks in the $62 trillion market. Lehman last week began offering clients the ability to trade some credit-default swaps with a fixed coupon, much like a corporate bond, and is advocating making it a standard across the market.
- Spain's housing collapse is becoming European Central Bank President Jean-Claude Trichet's economic crisis as delinquent home-loans rise amid a slowing economy.
- Corn fell for the first time in four sessions and soybeans dropped to the lowest in almost eight weeks as rains and warm weather improved crop conditions in the U.S., the world's biggest exporter of both crops. About 66 percent of the corn was in good or excellent condition as of July 27, compared with 65 percent a week earlier, the U.S. Department of Agriculture said yesterday. About 62 percent of the soybeans got the top ratings, compared with 61 percent a week earlier, the USDA said. Conditions for both crops are better than a year ago, easing concern caused by Midwest flooding in June that sent prices to records. ``The corn and soybean crops are in pretty good shape and the markets will experience further liquidation,'' said Greg Grow, director of agribusiness for Archer Financial Services in Chicago. ``Without a new weather threat, the trend is for lower prices.''
- Merrill Lynch & Co.'s(MER) decision to liquidate $30.6 billion of collateralized debt obligations at a fifth of their face value ``suggests the endgame'' for CDO risk at financial companies, Bank of America Corp. analysts said.
- The cost of protecting Merrill Lynch(MER) bonds from default fell the most in more than four months after the third-largest US securities firm said it will sell $8.5 billion in stock and liquidate mortgage-linked securities. Credit-default swaps on NY-based Merrill plunged 65 basis points to 275 basis points, according to broker Phoenix Partners Group.
- U.S. Steel Corp.(X), America's largest steelmaker by market value, climbed the most in seven years in New York trading after second-quarter profit more than doubled, beating analysts' estimates. U.S. Steel rose $20.88, or 14 percent, to $166.21 at 1:30 p.m. on the New York Stock Exchange. A close at that price would be the biggest one-day gain since April 24, 2001.
- Palm Inc.(PALM) rose the most in four years on the Nasdaq after saying its Centro e-mail phone sold 2 million units in less than a year, a sign the company is weathering competition from the BlackBerry and Apple Inc.'s iPhone.
- SAP AG(SAP), the world's biggest maker of business-management software, raised its revenue and margin forecasts for this year after second-quarter license sales beat analysts' estimates.
- India's central bank increased its benchmark interest rate by a half point, more than economists predicted, and forecast slowing economic growth as inflation at a 13-year high erodes spending by consumers and companies. The Reserve Bank of India raised its repurchase rate to 9 percent from 8.5 percent, the third increase in two months, according to a statement in Mumbai today.

Wall Street Journal:
- What if I told you that a prominent global political figure in recent months has proposed: abrogating key features of his government's contracts with energy companies; unilaterally renegotiating his country's international economic treaties; dramatically raising marginal tax rates on the "rich" to levels not seen in his country in three decades (which would make them among the highest in the world); and changing his country's social insurance system into explicit welfare by severing the link between taxes and benefits?
- Earlier this month the House of Representatives voted on an energy bill called the Drill Responsibly in Leased Lands (Drill) Act. The good news, for those of us who actually want to do something to lower gas prices, is that it failed.
- A Bush administration proposal to boost fuel efficiency of automobiles to 31.5 miles per gallon by 2015 is raising hackles on two sides: from car makers, who say it is too tough, and from some Democrats, who say it isn’t tough enough.
- Deutsche Bank AG has avoided the worst of the banking carnage by pulling off a series of trades that have lightened its load of soured investments. While it still could need to write down assets or raise capital, Germany's largest bank by market value is positioning itself to be an acquirer in the second half.
- Hedge funds, viewing the carnage caused by the credit crisis, are starting to weigh opportunities in the battered financial sector. It is another sign for bullish investors that better times are ahead.

NYPost:
- Hedge fund BlueGold Capital might have struck black gold, with oil bets driving returns up a whopping 160 percent through the end of June. BlueGold just opened for business in February, but its eye-popping returns have already attracted attention - and money - from investors. Indeed, assets have grown by more than six times since inception to $925 million, according to a BlueGold official and the company's most recent letter to investors. The true test for BlueGold, however, may be in its July returns, as oil prices have tanked in recent weeks, said Chris Schelling, a researcher of alternative investments with Thomson Reuters. "My guess is their numbers for July will be awful," said Schelling, noting that the fund is close to 90 percent correlated with the oil markets. Indeed, their only bad month so far - down 16.3 percent - occurred in March when oil prices fell slightly. Crema declined to comment on the firm's strategy except to say that BlueGold makes the bulk of its oil bets using complex derivative contracts.

Seeking Alpha:
- Illegal Short Sellers May Face RICO Indictments. RICO, Racketeering Influenced Corruption Organizations Act, the law Rudy Guiliani used to bring down Michael Milken, and other Wall Street crooks, could be revisited in the SEC's struggle to clean up Wall Street's growing threat to the financial markets.

San Francisco Chronicle:
- Billionaire investor T. Boone Pickens excoriated Yahoo's management for failing to reach an agreement to sell all or part of the Web portal to Microsoft Corp. Pickens, who bought 10 million Yahoo shares in May in hopes that an acquisition was imminent, said Monday that he got tired of waiting for a deal and sold his entire holdings at a loss. "I think that Yahoo management was pathetic," Pickens told The Chronicle's editorial board.

USA Today:
- U.S. combat deaths in Iraq appear headed to the lowest monthly total since the start of the war as the top U.S. general there said overall violence is declining toward "normal" levels.

Izvestia:
- Russia may be hurt by the potential bursting of the “oil bubble,” caused by a “long period of slowing economic growth” that the world has entered, Russia central banker Alexei Ulyukayev said.

Caijing magazine:
- China must “absolutely ensure” the stability of its capital markets during the Olympic Games, citing the nation’s top securities regulator. China’s stock-market watchdog must quell market rumors and control risk points in the system, citing Shang Fulin. China’s benchmark CSI 300 Index has plummeted 45.6% this year, making it the world’s worst-performing major equities market.

China Daily:
- China may delay any increase in fuel prices until after the Olympics end next month. China’s leaders have agreed to gradually deregulate gasoline and diesel prices, and probably won’t do so before the end of the games, citing Lin Boqiang, an energy professor at Xiamen Univ. The country increased gasoline and diesel prices by as much as 18% on June 20.

Reuters India:
- OPEC should not consider cutting production after oil's steep two-week decline as markets are now balanced, OPEC President Chakib Khelil said on Tuesday, adding that prices could yet fall another $50 a barrel. Khelil, who is also Algeria's oil minister, said oil prices could fall to $70 to $80 in the long-term, if the U.S. dollar continued to strengthen and geopolitical anxieties eased. “The price today is abnormal at $123 a barrel,” said Khelil. Asked if OPEC members should cut supply if oil prices continue to decline, he said: "No, I don't think so, why should they cut production? They always want to make sure there is good supply and demand and to satisfy the demand."

Haaretz:
- Senior officials in Jerusalem confirmed Monday that Syria has carried out a number of measures in recent weeks that reflect that it is taking talks with Israel seriously.

Al-Hayat:
- Oil revenue at the six Persian Gulf states will probably rise 57% this year on higher oil prices, citing a report by the Gulf Cooperation Council’s general secretariat. GCC countries may earn $600 billion in 2008, compared with $381 billion in the prior year.

Bear Radar

Style Underperformer:

Large-cap Growth +1.32%

Sector Underperformers:

Gold irlind (-2.58%), Oil Service (-1.44%) and Coal (-1.43%)

Stocks Falling on Unusual Volume:

SNE, HERO, JDAS, CBEY, PRSC, CGNX, LDSH, INDM, SEPR, RCII, CPHD, XL, KDN, DAC, ICA and RBC

Stocks With Unusual Put Option Activity:

1) KFT 2) MOT 3) NTAP 4) FMCN 5) LFG