Tuesday Watch

Late-Night Headlines
Bloomberg:
- The US dollar rose, approaching a six- week high against the euro, before a Federal Reserve decision today at which policy makers may leave interest rates on hold and emphasize risks to inflation. The currency also traded near a seven-month high versus the yen after crude oil fell to a 13-week low, bolstering the economic outlook of the U.S., the world's largest consumer of the fuel. The Australian dollar traded near a three-month low on speculation the nation's central bank will signal after a meeting today policy makers are preparing to cut borrowing costs.
- Merrill Lynch & Co.(MER), the U.S. securities firm that booked almost $19 billion of net losses in the past four quarters, may become profitable soon, Chief Executive Officer John Thain said. ``We will shortly be back to profitability,'' Thain told CNBC.
- Wheat prices will drop 17% on average in the current quarter from the second quarter after farmers planted more, setting the stage for a 9% jump in output by June next year, Rabobank International said. Wheat futures on the Chicago Board of Trade will average $7 a bushel in the quarter ended Sept. 30, down from $48.46 in the second quarter, Luke Chandler, a senior commodity analyst, said in a montly report today.
- New Zealand, the world's largest exporter of dairy products, is forecasting further declines in world prices through 2009 as the country's herd increases and farmers in the U.S., Europe and Australia boost production. Global production will rise as Australia and New Zealand output recovers from drought and yields in the U.S. industry improve, New Zealand's Ministry of Agriculture said in an annual forecast today. A 2 percent increase in the European Union's production quota will also add about 2.8 million tons of output starting this year.
- Copper plunged to a six-month low as rising inventories on the London Metal Exchange and a slowing global economy signaled weaker demand for the metal. Stockpiles monitored by the LME jumped 19 percent since July 1 and are the highest since February. Manufacturing in China, the world's biggest metals buyer, contracted in July for the first time since a survey began in 2005. The price of copper used for electrical wires and plumbing is down 19 percent from a record in May. ``Copper is just looking ugly,'' said Matthew Zeman, a trader at LaSalle Futures Group in Chicago. ``With the global economic slowdown, and a steady rise in stockpiles, it's hard to see any reason that copper won't continue to drop. Prices could fall quite a bit fairly quickly.''
- Wheat fell to the lowest in two months on speculation that demand for the grain as an alternative livestock feed will slow after the price of corn plunged. Wheat's premium to corn rose to more than $2 a bushel last week from 89 cents on July 7. Corn, the main ingredient in feed, dropped to the lowest price since March today and is down 30 percent from a record in June, as warm, wet weather revived Midwest crops. Rising supplies also are eroding the value of wheat. World production will rise 8.8 percent to a record this year, the U.S. Department of Agriculture said last month.
- Children who regularly skip an hour's sleep double their chances of being overweight, a study found.
- Fannie’s(FNM) Mudd Soothed Asian Investors as Bonds Rose.
- The value of all land and buildings on farms in the US averaged $2,350 an acre at the start of this year, a new record and up 8.8 percent from a year earlier, the U.S. Department of Agriculture said today in an annual report.
- Australian demand for services shrank for a fourth month in July as the highest interest rates in 12 years forced consumers and businesses to cut spending on transport, hotels and restaurants. The performance of services index fell 2.6 points to 42.8 from June, the lowest reading since the survey began in February, 2003. A reading below 50 indicates the sector is contracting.
- Michael Vogelzang, chief investment officer of Boston Advisors LLC, says oil may fall below $100/bbl. (video)

Wall Street Journal:
- Beijing Olympics Reveal China Reform Fantasy.
- Downshifting China’s Economy. China's National Development and Reform Commission reported last month that unsold inventories of cars in China rose to a four-year high of 170,000 units, a rise of roughly 50% from the beginning of the year. That inventory bulge was little noticed in the popular financial press, but it represents a potential trigger for the unwinding of what has appeared up to now to be a bulletproof growth boom for the Chinese economy. The sharp inventory increase in such a strategically important industry is a dangerous red flag. Up to now, record investment has been driving booming GDP growth, which in turn has been slowly but surely pushing up consumer spending. Surging automobile sales have been a key barometer of this trend, especially since 2004, when foreign capital inflows began to surge into China, and -- not coincidentally -- the economy started to take off into the current boom, which suddenly looks vulnerable. That such a large number of cars have gone unsold this year is a sign that consumers are increasingly reluctant to ramp up their spending. It's especially worrying since, given the complexity of automobile manufacturing, a slowdown in auto sales can ripple through the larger Chinese economy via the large network of suppliers supporting the industry. Worse than the inventory overhang itself is the fact that there isn't an easy policy solution.
- Mutual-fund firm Third Avenue Value Management LLC, known for its deep value-investing style, where managers look for cheap stocks, is planning to raise a private-equity fund to invest in distressed companies. Led by well-known investor Marty Whitman, the New York-based firm has been investing in distressed securities since the 1980s, mainly through its flagship Third Avenue Value mutual fund.
- The auto industry said federal regulators are pushing too far, too fast in their effort to raise fuel-mileage rules. The complaints from the industry, which had previously voiced support for tougher standards, underscore how economic hardship is affecting a major policy debate. Auto makers are objecting to new rules being crafted by the National Highway Traffic Safety Administration. The rules would require car makers to achieve a fleet-wide average fuel efficiency of at least 31.6 miles per gallon for cars and trucks by 2015, up from about 25 mpg today. The rules are a first step toward Congress's goal of achieving average fuel economy of at least 35 mpg by 2020.
- The New York Mercantile Exchange said it plans to introduce a futures contract based on prevailing market prices for hot-rolled steel coil in the U.S. Midwest region early in the fourth quarter. The contract will be financially settled against an index developed by CRU Indices Ltd., a subsidiary of CRU International Ltd., a supplier of steel-industry information.

MarketWatch.com:
- Mutual funds that invest in U.S. companies are consistently outperforming their international counterparts for the first time in more than five years as rising inflation and slowing growth in China and India sting the markets. Domestic funds have beaten international funds in six of the past nine months, the best domestic-fund run since the category outperformed international funds in eight of the 10 months beginning in August 2002.
- Federal Reserve policymakers are not going to give a clear signal of where rates are headed after their meeting on Tuesday, economists said. Economists expect a "neutral" statement that won't prepare markets for a rate hike in the near term.

CNBC.com:
- In a move to drum up much needed capital and offset a likely multi-billion writedown, officials at Lehman Brothers Holdings(LEH) have held conversations about the possible sale of the firm's entire investment management division, which includes its Neuberger & Berman asset management unit as well as stakes in hedge funds and private equity funds, according to a people with knowledge of the matter.
- U.S. drivers found more relief at the pump as the national price for gasoline dropped to its lowest level in 11 weeks, the government said on Monday. The price for regular, unleaded gasoline declined 7.5 cents over the last week to an average $3.88 a gallon, the federal Energy Information Administration said in its weekly survey of service stations.

NY Times:
- Lilly(LLY), Amylin’s(AMLN) Byetta May Extend Diabetics’ Lives.
- Many Chinese have been expecting a post-Olympics economic slowdown, but it has already started and the Games have not even begun. Chinese factories reported a plunge in new orders last month. Exports are barely growing. The real estate market is weakening, with apartment prices sinking in southeastern China, the region hardest hit by economic troubles. The trends, which actually have little to do with the Olympics (the Games themselves, which open Friday, are small compared with the size of the economy), are being felt worldwide.

BusinessWeek.com:
- How Cloud Computing Is Changing the World. A major shift in the way companies obtain software and computing capacity is under way as more companies tap into Web-based applications.
- That iPhone Nano Rumor…

IBD:
- Drug Companies Look To Outsource For Oversight Of Clinical Trials.

USA Today.com:
- Toxic plastic toys could go the way of dinosaurs.

Reuters:
- OPEC’s crude-oil production advanced for a third month on increased production from Saudi Arabia, the world’s top oil exporter. Supply climbed to 32.6 million barrels a day in July, from 32.3 million barrels a day in June, according to a Reuters survey of oil companies, OPEC officials and analysts. Saudi Arabia’s production rose to 9.7 million barrels a day, up from earlier estimates of 8.9 million.
- A union representing oil workers in Brazil’s main offshore oil production region decided to cancel a strike scheduled for tomorrow after accepting a contract offer from state-controlled Petrobras(PBR).

Financial Times:
- Best Buy(BBY) is to push ahead with a more aggressive roll-out of stores in the UK than analysts and competitors had expected, with some 200 stores planned over the long-term. The plans underline the scale of the US electronic retailer's ambition for its European venture with Carphone Warehouse.

The Economic Times:
- After warnings from global ratings firms — Standard and Poor’s (S&P) and Fitch, it’s Moody’s turn now to voice concerns on India’s sovereign outlook. According to the agency, risks for the economy have grown, but not to the extent that the ratings would be threatened. In a report released on Monday, the agency said, “Higher oil prices and lack of fiscal policy reactions amidst high pent-up price pressures are putting the burden of macro-economic adjustment on monetary authorities. As a result, policy as well as market interest rates could rise, and a sharp deceleration in growth may follow.”

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (TTEC), target $20.
- Reiterated Buy on (LMT), target $119.
- Downgraded (FIG) to Sell, target $9.
- Reiterated Buy on (PBI), target $51.

Night Trading
Asian Indices are -1.75% to -.25% on average.
S&P 500 futures +.10%.
NASDAQ 100 futures +.10%.

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Earnings of Note
Company/EPS Estimate
- (ADM)/.69
- (COV)/.66
- (EAT)/.42
- (MVL)/.44
- (EMR)/.80
- (MGM)/.42
- (PG)/.78
- (WY)/-.19
- (RDC)/1.05
- (JOE)/.11
- (DNR)/.54
- (TAP)/1.15
- (AMSC)/-.05
- (CKP)/.43
- (DHI)/-.90
- (HEW)/.45
- (PDX)/.79
- (DUK)/.24
- (NWS/A)/.35
- (CSC)/.76
- (GGC)/-.47
- (PZZA)/.41
- (FST)/1.50
- (JBX)/.51
- (WMS)/.35
- (PCLN)/1.41
- (CSCO)/.39
- (VMC)/1.18
- (N)/-.01
- (WFMI)/.31
- (ONXX)/.07
- (NILE)/.18
- (BID)/1.38
- (VNO)/1.41
- (WEN)/.37
- (KCP)/-.12

Upcoming Splits
- None of note

Economic Releases
10:00 am EST
- The ISM Non-Manufacturing Composite for July is estimated to rise to 48.7 versus 48.2 in June.

2:15 pm EST
- The FOMC is expected to leave the benchmark fed funds rate at 2.0%.

Other Potential Market Movers
- The weekly retail sales reports, BMO Capital Healthcare Conference, RBC Tech/Media/Communications Conference, (MU) analyst conference and Pacific Crest Tech Forum could also impact trading today.

BOTTOM LINE: Asian indices are lower, weighed down by financial and commodity shares in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.

Stocks Finish Near Session Lows, Weighed Down by Commodity, Construction and Homebuilding Shares

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In Play

Stocks Lower into Final Hour on Global Growth Concerns, Forced Selling

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semi longs, Medical longs, Biotech longs and Commodity shorts. I added (IWM)/(QQQQ) hedges and added to my (EEM) short today, thus leaving the Portfolio 75% net long. The tone of the market is modestly negative as the advance/decline line is slightly lower, sector performance is mixed and volume is about average. Investor anxiety is above average. Today’s overall market action is bearish. The VIX is rising 2.4% and is still above-average at 23.11. The ISE Sentiment Index is low at 111.0 and the total put/call is slightly above average at .94. Finally, the NYSE Arms has been running around average most of the day and is currently .88. The Euro Financial Sector Credit Default Swap Index is rising 1.5% today to 84.83 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 rising 2.4% today to 135.5 basis points. The TED spread is falling 2.4% to 1.11. The 10-year TIPS spread, a good gauge of inflation expectations, is stable at 2.29%, which is the lowest since May 2nd and down 34 basis points in less than a month. As I said several weeks ago, the stunning rally in the hated financials and decline in the much-loved commodities would likely lead to a spike in hedge fund closure rumors. We have been getting those rumors and today’s action indicates to me that some of those rumors are likely true. Mid-cap growth shares, which had been the best performers for quite some time, are especially weak today. This is likely a result of momentum funds cutting risk across the board. Financial shares continue to consolidate recent gains well. The (XLF) is near session highs. The energy sector corporate insiders picked up selling substantially last week. Energy insiders sold $507,492,959 worth of stock, while only purchasing $22,379,085 worth. This is noteworthy, especially considering insider activity remains quite bullish in other sectors. The Energy Intelligence Group reported that global oil production remained at a record high of 87.8 million barrels per day in June, with global demand at 86.8 million barrels per day. I think global demand for oil began to decelerate in July much more than is commonly perceived by the many oil bulls. I suspect emerging markets will likely see weakness again tonight. Brazil, Russia, India and China, which had been investor favorites, are under the most pressure now. Nikkei futures indicate an +27 open in Japan and DAX futures indicate an +39 open in Germany tomorrow. I expect US stocks to trade modestly lower into the close from current levels on forced selling, global growth worries and more shorting.

Today's Headlins

Bloomberg:
- Plunging prices for cocoa, natural gas and sugar are sending the Reuters/Jefferies CRB Index of 19 commodities to it biggest one-day decline since March. The CRB index fell 3.3 percent to 402.22 at 12:59 p.m. in New York, which would mark the largest slide since March 19. ``Speculation had been driving these markets and they were due for a correction as so many prices had gotten overdone,'' said Peter Sorrentino, who helps manage $16.7 billion at Huntington Asset Advisors in Cincinnati. ``There are moderating growth expectations that are going to hurt industrial commodities. Going forward, you have to be very selective.'' Commodities are ``at the beginning of a long-term bear market,'' after rallying the past seven years, Michael Aronstein, chief investment strategist at Oscar Gruss & Son Inc. in New York, said last week. Aronstein correctly said in June that prices for raw materials would start to decline.
- Crude oil fell below $120 a barrel for the first time since May amid speculation that Tropical Storm Edouard will miss most offshore oil facilities as it approaches the coast of Texas. Futures fell as much as $5.60 a barrel, shrugging off port closings and rig evacuations in the Gulf, a threat to oil supplies from Iran and a fire at Valero Energy Corp.'s Houston refinery. Edouard, which may become a hurricane tomorrow, is on a course for Galveston, Texas, the biggest U.S. petroleum port. ``A market that can't rally on bullish news is a bear market,'' said Tim Evans, an energy analyst for Citi Futures Perspective in New York. ``We're just seeing disappointment that for all of the tropical-storm news, the talk of Iran and Valero's explosion, all of these bullish stories are not pushing the price higher.'' Regular gasoline at the pump, averaged nationwide, fell 0.6 cent to $3.881 a gallon, AAA, the nation's largest motorist organization, said today on its Web site. Pump prices reached a record $4.114 a gallon on July 17, as higher prices curbed demand. ``Demand destruction seems to be gaining some credibility and traction,'' said Kyle Cooper, an analyst at IAF Advisors in Houston. News about Iran testing a new anti-ship weapon this weekend and the storm ``would have had the market up $5 three months ago. The fact that it hasn't does indicate some shift in psychology.''
- The Baltic Dry Index, a measure of shipping costs for commodities, posted its longest run of losses for three years, haven fallen for 17 consecutive sessions, on speculation Chinese cargo buyers are curbing their demand.
- Soybeans dropped to the lowest in almost three months and corn fell as rain and cooler temperatures in the Midwest improve yield potential after hot weather stressed crops in the U.S., the world's biggest producer.
- Citigroup Inc.(C) is closing a $400 million convertible arbitrage fund, the final step in winding down its $2 billion Tribeca Global Investments group, people familiar with the plans said.
- Drugs made by Gilead Sciences Inc.(GILD) that have been shown to treat the AIDS virus will be tested in healthy people to see if they can prevent the lethal disease.
- ImClone Systems Inc.'s(IMCL) board, led by billionaire investor Carl C. Icahn, said Bristol-Myers Squibb Co.'s(BMY) $4.3 billion buyout is too low and undervalues ImClone's pipeline of experimental cancer drugs.
- The 65 days that plunged Brazil into a bear market are reminding investors that Latin America's biggest economy is still an emerging nation.
- Beijing's air-pollution index rose above the World Health Organization recommended maximum for the first time in four days, less than 96 hours before the opening of the Olympic Games.

Wall Street Journal:
- Unleashing America’s Ingenuity By Unlocking Its Energy.
- Van Wagoner Emerging Growth has consistently disappointed investors, giving it a dubious distinction as the worst-performing U.S. actively managed stock fund over the past 10 years. But at least one thing is changing at the woebegone fund: Longtime manager Garrett Van Wagoner is planning to step down, even though Mr. Van Wagoner, 52 years old, controls the company that sponsors the fund, Van Wagoner Capital Management.
- July turned out to be the slowest month for initial public offerings world-wide in five years, and no significant pickup is expected this month.
- Google’s(GOOG) YouTube will be getting a small slice of the Olympic pie, too, the Intl. Olympic Committee said.
- Iraqi cleric Muqtada al-Sadr plans to disband his Mahdi Army militia and change the group into a civic and social-service organization.

Washington Post:
- In his latest film incarnation, Batman rescues Gotham from the Joker. In real life, the Caped Crusader’s blockbuster movie, The Dark Knight, is proving to be a lifesaver for IMAX(IMAX), a chain of specialty theaters.

CNNMoney.com:
- The Rise and Fall of Jimmy Cayne.

Advertising Age:
- Prius Demand Surges as Gas Prices Rise.

Reuters:
- Singapore Telecommunications Ltd., Southeast Asia's largest telecoms firm, will launch Apple Inc's (AAPL) third-generation iPhone in Singapore before the end of August.
- General Electric Co (GE) has no plans to sell its NBC Universal media unit and is on track to double its China annual revenue to $10 billion by 2010, a top executive said on Monday. Some investors have said they would like Chief Executive Jeff Immelt to consider selling NBC after the Olympics because it is growing more slowly than GE's infrastructure businesses. GE has been using the Games as a chance to show off its energy-efficient "Ecomagination" line, and says it is contributing to 400 infrastructure projects in and around Beijing.

Financial Times:
- The world must repel calls to contain competitive markets, by Alan Greenspan. The surprise of recent months is not that global economic growth is slowing, but that there is any growth at all.

Bild:
- German companies will start cutting jobs this winter as slowing global economic growth threatens demand for goods made in Europe’s largest economy, citing economists and lobbyists.

Vedomosti:
- Apple Inc.’s(AAPL) iPhones will go on sale in Russia next year, citing Evgeny Butman, a Moscow-based director of Apple IMC, Apple’s official vendor in the country. No single carrier will have exclusive rights to iPhone’s service contracts.

Bear Radar

Style Outperformer:

Mid-cap Growth (-2.64%)

Sector Outperformers:

Coal (-7.11%), Oil Tankers (-6.0%) and Oil Service (-5.51%)

Stocks Rising on Unusual Volume:

RRC, UDRL, SMG, SWSI, FCX, RIIO, CHIC, RAIL, VRTX, HNSN, SIRO, CBEY, VISN, DISCA, SBAC, NTL, IEO, TNP and AEC

Stocks With Unusual Call Option Activity:

1) TRA 2) LRCX 3) WMB 4) ETR 5) MNST

Personal Spending/Incomes Exceed Estimates, PCE Core Rises Slightly More, Factory Orders Jump

- Personal Income for June rose .1% versus estimates of a -.2% decline and a 1.8% increase in May.

- Personal Spending for June rose .6% versus estimates of a .4% gain and a .8% increase in May.

- The PCE Core for June rose .3% versus estimates of a .2% gain and an upwardly revised .2% increase in May.

- Factory Orders for June rose 1.7% versus estimates of a .7% gain and an upwardly revised .9% increase in May.

BOTTOM LINE: Personal Incomes and Spending exceeded economists’ estimates in June, while the PCE Core increased slightly more, Bloomberg reported. About $28 billion in tax rebates went out in June, versus $50 billion in late April and May. The PCE Core, the Fed’s preferred inflation gauge, rose 2.3% year-over-year in June, which is still below the 20-year average of a 2.4% rise and well below the 3.6% year-over-year increase going back to January 1960. Despite the diminishing positive effects from the tax rebates and numerous headwinds, weekly retail sales remain at multi-month highs and now energy and food prices are falling significantly. The S&P Goldman Agriculture Commodity Spot Index is down another -4.86% today and is breaking convincingly below its 200-day moving average for the first time since June 2004. This index is now in bear market territory, falling 22% from its closing high set on March 12^th of this year. As well, oil is dropping 3.3%, despite Iran/hurricane worries, and has plunged 18% in three weeks. The broad CRB commodity index is down 15% in a month. This is a large positive for the consumer psyche and spending that investors seem to be ignoring right now.

Factory Orders in the US rose more than forecast in June, Bloomberg reported. The 1.7% rise in bookings was the largest this year. Orders excluding volatile transportation equipment rose 2.3%, the most since April. Manufacturers had 1.22 months worth of goods on hand at the current sales pace, down from 1.23 months in May. Bookings for capital goods excluding defense and aircraft, a gauge of future business demand, rose a healthy 1.2% in June. Shipments of such goods, which is used to compute GDP, rose .7%. I expect factory orders to rise again in July on inventory rebuilding.