BETWEEN THE HEDGES

- Preliminary 2Q Non-farm Productivity rose 2.2% versus estimates of a 2.5% increase and a 2.6% gain in 1Q.

- Preliminary 2Q Unit Labor Costs rose 1.3% versus estimates of a 1.4% gain and a 2.5% rise in 1Q.

- Wholesale Inventories for June rose 1.1% versus estimates of a .6% rise and a .9% increase in May.

BOTTOM LINE: Worker productivity in the US grew at a healthy rate in the second quarter and unit labor costs decelerated, Bloomberg reported. Usually, productivity growth suffers during energy spikes. The fact that productivity growth remains strong is a large positive. Unit Labor Costs, which make up about two-thirds of inflation, rose 1.3% during 2Q versus the long-term average of a 3.3% increase. Investors’ long-term inflation expectations continue to fall rapidly. I expect productivity to remain healthy and unit labor costs to remain low over the intermediate-term.

Inventories at US wholesalers rose faster than forecast in June, led by gains in stockpiles of higher-priced petroleum, farm goods and metals, Bloomberg said. Despite a 4.7% decline in vehicle sales, Wholesale Sales surged 2.8% in June, the most since March 2004, after a strong 2.2% increase in May. Distributors had enough supplies on hand to last 1.06 months at the current sales pace, a new record low, versus 1.08 in May. Inventories of computer equipment fell 1.2% in June and machinery stockpiles fell .3%. Companies pared inventories in 2Q at a $62 billion annual pace, the fastest drawdown since 4Q 2001. The US economy grew at a 1.9% pace during 2Q despite the fact that falling inventories reduced growth by 1.9 percentage points. Inventory rebuilding should add meaningfully to 3Q/4Q US growth as sales remain healthy on the substantial fall in food and energy prices.

Late-Night Headlines
Bloomberg:
- The US dollar headed for its biggest weekly gain against the yen in two months as oil extended declines from a record, supporting economic growth in the world's largest consumer of the fuel. The euro was on course for its fourth weekly decline, its worst losing streak since May 2007, after European Central Bank President Jean-Claude Trichet said risks to economic growth are ``materializing,'' reducing expectations policy makers will raise interest rates. The Australian dollar fell for a ninth day, its longest losing streak since 1980, as traders added to bets the nation's central bank will cut borrowing costs. ``Oil prices have turned out to be much more supportive of the dollar than I expected,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``It does temporarily relieve some concern that the U.S. economy will weaken further. This is a plus for sentiment.'' A drop in the European currency below $1.53 signals ``a longer-term dollar bull phase,'' pointing to a further decline to $1.46, Kevin Edgeley, a technical analyst at Goldman Sachs Group Inc. in London, wrote in a research note yesterday.
- Gold fell for a fifth straight session, the longest losing streak since June 2007, as a rebound in the dollar eroded the appeal of the precious metal as an alternative investment. Silver also declined. ``If gold continues to trade under the 200-day moving average, you're going to have people selling left and right into the rallies,'' Zeman of LaSalle Futures said.
- The Australian dollar fell for a ninth day, its longest losing streak since 1980, on speculation the Reserve Bank of Australia will reduce borrowing costs from a 12- year high as a drop in consumer spending cools inflation. ``There is growing talk of RBA rate cuts and commodity prices are plunging,'' said Akifumi Uchida, deputy general manager of the marketing unit at Sumitomo Trust & Banking Co. in Tokyo. ``A selling scenario seems to be under way for the Aussie,'' he said. Traders are betting the Reserve Bank will lower borrowing costs by 97 basis points over the next 12 months, compared with the 32 points of cuts estimated two weeks ago, according to a Credit Suisse Group index based on interest-rate swaps.
- Toyota Motor Corp.(TM), the world's second-largest carmaker, rose most in two weeks on the Tokyo Stock Exchange after the company reported better-than-expected earnings and reiterated its full-year forecast.
- Wheat production in Australia, forecast to be the world's third-largest exporter, may exceed a government prediction after rainfall in July and farmers sowed a record crop, ProFarmer Australia said.
- India, Asia's biggest supplier of soybean meal, may ship a record quantity next year after rain in the biggest growing regions encouraged increased planting, a producers' group said.
- Michael Metz, Oppenheimer Holdings Inc.'s chief investment strategist who cautioned that stocks were overvalued amid the exuberance of the late 1990s, died yesterday. He was 79.
- Sprint Nextel Corp.(S), the third-biggest U.S. wireless carrier, scrapped plans for a $3 billion offering of convertible preferred stock after failing to find the terms it sought.

Wall Street Journal:
- Rumors Drive Options Trading in King(KG), Marvell(MRVL).
- Pushing to put one of the biggest debacles of the credit crisis behind them, Citigroup Inc.(C) and Merrill Lynch & Co.(MER) agreed to buy back $17 billion in auction-rate securities.
- McCain, Obama release names of largest fundraisers.

MarketWatch.com:
- A surge in financial-services stocks and slumping energy markets hit some hedge funds hard in July, leaving the $2 trillion industry on course for its worst year in at least two decades.

CNBC.com:
- Despite the recent run up in financial stocks, data from Thomson Reuters shows that short positions for some of these banks are still nearly double what they were six month ago.

NY Times:
- The UK Confronts Slowdown as Economy Nears Recession.

Forbes.com:
- In a huge win for backers of biofuels, the U.S. Environmental Protection Agency Thursday denied a closely watched request to grant Texas a 50% waiver from a federal renewable fuel standard mandate. The ruling will most likely accelerate the boom in ethanol production in the United States, which has attracted massive investments in the past few years from companies like British Petroleum (BP), DuPont (DD), Cargill and Archer Daniels Midland (ADM).Industry insiders say the EPA decision will also advance the arrival of next-generation biofuels produced from non-agricultural feedstocks.

CNNMoney.com:
- Gas prices down 21 days in a row. The national average price for a gallon of gas slips to $3.849.

USA Today.com:
- Cars are getting more reliable, JD Power study shows.

Reuters:
- Borrowing one of nature's best designs, U.S. scientists have built an eye-shaped camera using standard sensor materials and say it could improve the performance of digital cameras and enhance imaging of the human body. The device might even lead to the development of prosthetic devices including a bionic eye, they said.
- A banking group has renewed its plea to the Securities and Exchange Commission to broaden a rule aimed at curbing abusive short selling and market manipulation. The American Bankers Association, a trade group which represents banks of all sizes, said on Thursday that distort-and-short campaigns push stock values below what market and bank conditions warrant. "At a time, when the economy is clearly under stress, the commission has a responsibility to assure that destructive practices such as abusive naked short selling are stopped," said the letter dated August 7. The SEC has said it will consider crafting a rule to crackdown on abusive short selling across the broader market.
- New York Community Bancorp (NYB) is actively looking for acquisitions, which could happen soon if it found the right partner to off-load assets to, said analysts at Morgan Stanley after meeting with the company's management.
- Billionaire Carl Icahn has been confirmed as a member of the board of Yahoo! Inc., as part of an agreement to drop his opposition to the Internet search company’s management.

Financial Times:
- Few people are more likely to need a holiday than Barack Obama. Yet as he heads off on Friday for his first week-long break since he launched his presidential bid 19 months ago, Mr Obama is dogged by rising angst about his campaign's direction. With polls showing him neck-and-neck with John McCain at a stage at which many Democrats expected he would be in the clear lead, they worry about the kind of stray image that helped to defeat John Kerry in 2004.
- Wal-Mart(WMT) , the world's largest retailer, says the new small Marketside grocery stores it is to launch this autumn could expand to a chain of more than 1,000 stores, delivering $10bn-plus in annual sales.
- One of Barack Obama's most important backers is in talks to become an adviser to the Renewable Fuels Association, the most powerful ethanol lobby in the US capital. Tom Daschle, the former Democratic Senate majority leader who has long been an influential champion of the ethanol industry, told the Financial Times about the move in an interview.
- Executives of large private equity firms believe they have found ways of overcoming US rules that make it difficult for their funds to buy large stakes in banks. This would position them to bolster the faltering sector without changes in regulations.

Telegraph:
- The danger of a systemic banking failure has passed and the worst of the credit crisis is over, Barclays' chief executive, John Varley, declared yesterday.

The Financial Express:
- It could well be a return to the dark days of the late eighties and early nineties where balance sheet window dressing was rife among Indian corporates. And this was one of the reasons for overseas investors to keep their participation in India at low-key levels. However, globalization and growing corporate responsibility saw India Inc clean up its act. This aided valuations as the India growth story looked extremely attractive and subsequently Indian companies started getting premium valuations, as compared to its other south Asian peers. But the first quarter results have shown that the rush to shore up numbers has taken precedence over conservatism, an essential accounting principle. This could well cost them.

Nikkei English News:
- Tokyo Electric Power Co. plans to develop about 1,000 electric-car recharging sites in the greater Tokyo area over three years. The company, Asia’s biggest utility known as Tepco, seeks to have as many as 200 stations ready in fiscal 2009.

The Australian:
- A key Australian government economic adviser has launched a scathing attack on Labor's industry policy, railing against a "new protectionist" push for extra assistance and slower tariff cuts for car, textile and other manufacturing industries.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (WW), target $64.
- Reiterated Buy on (ARE), target $122.
- Reiterated Buy on (NUAN), target $24.
- Lowered (WMG) to Sell, target $7.

CSFB:
- Rated (AAPL) Outperform, target $200. Key factors are enabling Mac momentum to defy macro conditions. We believe Mac performance is due to several unique drivers that were not present in prior downturns. We anticipate that Apple will continue to grow at a multiple of the overall market for many years to come. iPhone economics have changed for the better. We provide a comparative analysis of the old, revenue sharing iPhone business model and the new, subsidy-based model. After considering the economic costs of iPhone unlocking, we find that the new business model is likely to be far more profitable for Apple over the long-term. Apple’s content strategy adds customer switching costs to the iPhone model. As new users invest in software applications and iTunes content for the iPhone, we contend that Apple is once again building material switching costs into its model.
- Rated (LXK) Underperform, target $25.
- Reiterated Outperform on (HLEX), lowered estimates, target $36.

Night Trading
Asian Indices are -.75% to +.25% on average.
S&P 500 futures +.21%.
NASDAQ 100 futures +.29%.

Morning Preview
US AM Market Call
NASDAQ 100 Pre-Market Indicator/Heat Map
Pre-market Commentary
Pre-market Stock Quote/Chart
Before the Bell CNBC Video(bottom right)
Global Commentary
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Today in IBD
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Earnings of Note
Company/EPS Estimate
- (FNM)/-.69
- (MBI)/-1.37
- (EIX)/.75

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Preliminary 2Q Non-farm Productivity is estimated to rise 2.5% versus a 2.6% gain in 1Q.
- Preliminary 2Q Unit Labor Costs are estimated to rise 1.4% versus a 2.2% increase in 1Q.

10:00 am EST
- Wholesale Inventories for June are estimated to rise .6% versus a .8% gain in May.

Other Potential Market Movers
- The Bank of America Specialty Pharma Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by financial and shipping 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.

BETWEEN THE HEDGES

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Friday, August 08, 2008

Bear Radar

Productivity Healthy, Unit Labor Costs Decelerate, Wholesale Inventories at New Record Low as Sales Surge Most Since 2004

Bull Radar

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Thursday, August 07, 2008

Friday Watch

Stocks Finish at Session Lows, Weighed Down by Airline, Insurance, Biotech and Financial Shares