Today's Headlines

Bloomberg:
- The $1.9 trillion hedge fund industry, mired in its worst performance in two decades, faces ``much worse'' conditions than in 1998, when Long-Term Capital Management LP collapsed, a veteran of that fund said. ``Hedge funds live on credit and leverage and the ability to finance esoteric positions for a long time,'' said Hufschmid. ``To the extent liquidity is drying up as it is now, that becomes more difficult.'' This year's poor results mean fewer funds are starting, Hufschmid said. GlobeOp said none of the ``seven or eight'' clients it had ready to launch funds with $500 million to $2 billion in the first six months of the year had started. ``Some of them have given up,'' said Hufschmid.
- MBIA Inc.(MBI) rose as much as 15 percent in New York stock trading after the bond insurance company posted a profit that beat analyst estimates and said it would resume a share buyback program.
- MBIA Inc.(MBI) said it may sue Bill Ackman, striking back against the hedge fund manager who waged a six-year campaign against the bond insurer and said this year that the company may be insolvent. MBIA is ``assessing all our options, including litigation'' against Ackman's Pershing Square Capital Management LP, Chief Executive Officer Jay Brown said on a conference call today after the Armonk, New York-based company reported a $1.7 billion profit. Brown's comments came in response to an anonymously submitted e-mail asking if MBIA planned to follow-up on New York State Insurance Superintendent Eric Dinallo's comments in a Financial Times article last month saying that ``rumor mongering'' about a bond insurer's solvency ``crossed a line.'' ``MBIA agrees that statements may have violated New York state insurance law,'' Brown said.
- The ruble dropped the most in 3 1/2 years, Russia's Micex Index fell to a 22-month low and bond yields climbed after Prime Minister Vladimir Putin said ``war has started'' in the breakaway Georgian region of South Ossetia. Credit-defaults swaps, a measure of bond risk, jumped the most this year after Georgia's Interior Ministry said jets bombed the towns of Gori and Kareli near South Ossetia. Yields on government bonds rose. The Micex plummeted, bringing its decline this year to 28 percent after oil slid 20 percent from its July high. ``This is the last nail in the coffin,'' said David Tavadian, head of fixed income and derivative sales at Calyon Rusbank SA, a Moscow-based unit of Credit Agricole SA. Calyon's Russian loan book is worth $7 billion. ``It tells people that in Russia you have to be careful.''
- Commodity-linked exchange-traded products, or ETPs, attracted $10 billion in the first half, more than double the amount a year earlier, Barclays Capital said. Investors bought less than $4 billion of the products in the first six months of 2007 and 2006, London-based Gayle Berry and nine other Barclays analysts said in a report yesterday. `These trends reflect developments in the type of investors now being attracted to commodities, in particular the growing interest from retail investors.'' Commodities, as measured by the UBS Bloomberg CMCI Index of 26 raw materials, have advanced for six consecutive years. Prices are now declining on speculation that the record cost of oil, corn and other commodities will curb demand. The Reuters/Jefferies CRB Commodity Index of 19 commodities fell 10 percent in July, the biggest monthly drop since March 1980.
- The euro fell the most in almost eight years against the dollar as traders pared bets the European Central Bank will raise interest rates as the economy slows. The euro is poised for its biggest weekly loss since January 2005 after ECB President Jean-Claude Trichet yesterday said economic growth will be ``particularly weak'' through the third quarter. An index that tracks the dollar against the currencies of six U.S. trading partners touched the highest since February. ``This is the beginning of a new chapter for the dollar as Trichet and other central banks are paying more attention to the downside risk to growth,'' said Dustin Reid, a senior currency strategist at ABN Amro Bank NV in Chicago. The euro's decline below $1.53 and the break of the 200-day moving average at $1.5226 ``marks a significant change in sentiment for the dollar,'' pointing to a further decline to $1.46, Kevin Edgeley, a London-based technical analyst at Goldman Sachs Group Inc., wrote in a report today.
- Crude oil fell, heading for its fourth decline in five weeks, as the dollar gained the most in more than seven years against the euro, reducing the appeal of commodities as an inflation hedge. Oil dipped to $115.61 a barrel, a three-month low, as prices for commodities including metals and crops fell amid the dollar's gain. Crude has declined more than $30 from its July record. Futures have dropped more than 20 percent below the record $147.27 on July 11, a threshold commonly seen as the start of a bear market. Crude oil may extend declines next week amid weakening demand caused by a global economic slowdown, a survey showed. Thirteen of 35 analysts surveyed by Bloomberg News, or 37 percent, said prices will drop through Aug. 15.
- Corn and soybeans fell to the lowest prices in four months, extending this week's declines, as a surging dollar reduced the appeal of commodities as a hedge against inflation. ``When the dollar rallies as much as it has, it reduces the investment in commodities, including grains,'' said Roy Huckabay, an executive vice president for the Linn Group in Chicago. ``People that bought in the past two days, looking for improved demand at lower prices, are getting beat up today.'' Index funds that invest in a basket of commodities cut net- long positions by 3.7 percent to 372,405 corn contracts last week, down 18 percent from a record 452,568 contracts in February. Index funds that invest in baskets of commodities reduced net-long positions by 0.9 percent to 148,734 soybean contracts in the week ended July 29, down 25 percent from a record of 198,707 on Feb. 19, the data show. ``The dollar has been beat on by everybody for the past six years, yet was unable to make further downside progress in the past six months,'' said John Roach, president of Roach Ag Marketing Ltd. in Boca Raton, Florida. ``The dollar could have a big up move in the next 12 months,'' which will have a general depressing impact on all commodities, Roach said.
- Emerging-market stocks fell to the lowest level in almost a year as Russian equities tumbled on concern a conflict with Georgia will intensify and Chinese shares dropped before the start of the Olympic Games. ``What concerns us are these political issues,'' said Michael Keppler, who manages more than $1 billion in emerging market assets at Keppler Asset Management in New York. ``I'm certainly staying out of Russia at the moment as it's just not attractive at all.'' MSCI's measure of emerging markets has retreated 20 percent this year, while equity benchmarks from every country in the index except for Jordan and Morocco experienced bear-market plunges since September. The CSI 300 has tumbled 51 percent in 2008, the worst performance among benchmarks in the world's 20 biggest markets, while the Micex plunged 28 percent.
- McDonald's Corp.(MCD), the world's largest restaurant company, rose to the highest in 43 years of U.S. trading after July sales climbed more than analysts' estimates. Global sales by restaurants open at least 13 months advanced 8 percent, the biggest gain since February, after the Oak Brook, Illinois-based chain sold more chicken biscuits and $1 sweet tea in the U.S. and snack-sized chicken wraps in France. European outlets grew the fastest of three regions at 7.6 percent, while U.S. sales advanced 6.7 percent, McDonald's said today.
- Qwest Communications International Inc.(Q), the third-largest U.S. local phone company, rose the most in more than five years in New York trading after a Morgan Stanley analyst recommended the stock.
- Italy's economy unexpectedly shrank in the second quarter, edging it closer to the fourth recession in a decade as households and businesses struggle to cope with more expensive oil. The economy, first of the three biggest in the euro region to report second-quarter growth, contracted 0.3 percent after expanding 0.5 percent in January to March.
- Egypt's central bank increased its benchmark interest rate for a fifth time this year and warned it will ``not hesitate'' to raise it again to combat the highest inflation rate in the Middle East. Policy makers increased the benchmark overnight deposit rate by half a percentage point to 11 percent and the overnight lending rate by the same amount to 13 percent, the central bank said in a statement on its Web site today. The Cairo-based bank has raised the deposit rate by a total of 2.25 points this year.
- One of the favorites at the Beijing Olympics may be shares of Nike Inc.(NKE).

NY Times:
- A left-wing political group, Accountable America, plans to issue a “warning” letter to nearly 10,000 Republican donors, saying they will be investigated and face possible legal trouble if they give to conservative groups. The group has collected $200,000, and plans to raise a total of $2 million. The letter is an opening shot across the bow from an unusual new outside political group on the left that is poised to engage in hardball tactics to prevent similar groups on the right from getting off the ground this fall. Led by Tom Matzzie, a liberal political operative who has been involved with some prominent left-wing efforts in recent years, the newly formed nonprofit group, Accountable America, is planning to confront donors to conservative groups, hoping to create a chilling effect that will dry up contributions. “I doubt anyone will be intimidated by him,” he said, “but if it gives anyone pause, they are always welcome to give to Freedom’s Watch — all of our donors are entitled to complete anonymity by law.” Indeed, anonymity is a potential obstacle to the group’s efforts. Outside political groups organized as 501(c)4 entities, including Accountable America, do not have to disclose the names of their donors. Chris LaCivita, a Republican strategist, said Mr. Matzzie’s group was likely to have the opposite effect on potential donors, firing them up instead of discouraging them.

Washington Post:
- With the clock running out on preparations for the Democratic convention, advisers to Sen. Barack Obama are scrambling to reach a compromise with Sen. Hillary Rodham Clinton to appease her supporters and find roles for her and her husband. The Obama and Clinton camps said this week that they agree on a central point: They would like to avoid an embarrassing display of discord from Clinton's most ardent backers when the national convention begins in just over two weeks. Conversations about how to achieve that have increasingly focused on the question of whether Clinton's name will be offered in a roll-call vote by delegates to determine the nominee, even though she has said she is not challenging Obama's claim as the party's standard-bearer.

Reuters:
- A diet high in vitamin C may help lower the risk of developing diabetes, citing research in Archives of Internal Medicine. A study of almost 22,000 middle-aged and older patients found the ones with the highest levels of vitamin C were less likely to develop the illness over 12 years when compared to those with the lowest levels.

The Australian:
- Australia’s best known stockbroker has ended a long silence to say that short-selling rules are being widely abused here to the detriment of share market integrity and at a high cost to investors' retirement funds. Brent Potts, founder of Southern Cross Equities and before that Potts West Trumbull, said short sellers were using reporting loopholes to avoid revealing they were selling shares they did not own.

Journal de Angola:
- Angola’s output of coffee rose from nil during the 27-year civil war that ending in 2002 to 800 metric tons a year currently, citing Joaquim Pedro, director of agriculture in the northern Uige province. Increased investment in the industry and demand for the beverage will see production continuing to climb back to the thousands of tons produced when the southern African country gained independence in 1975.

Hurriyet:
- Turkish gasoline consumption slumped 9.7% in the first half of the year as prices rose. Consumption in the period fell to 1.4 million cubic meters of gasoline in the period, citing the Petrol Industry Association.

Milliyet:
- Turkish small business closures jumped 75% in the first seven months of the year to 28,338 units, citing data from the country’s largest business group. Turkey’s economy is slowing after the inflation rate rose to a four-year high last month and the central bank increased the benchmark interest rate by 1.5 percentage points to 16.75 percent since May.

Bear Radar

Style Underperformer:

Mid-cap Growth +1.07%

Sector Underperformers:

Gold irlind (-4.24%), Steel (-2.39%) and Oil Service (-2.23%)

Stocks Falling on Unusual Volume:

GOLD, ATW, NCTY, PGNX, PLLL, CEDC, DPTR, FWLT, PRX, ARP, SLV and CEP

Stocks With Unusual Put Option Activity:

1) SD 2) HANS 3) RAH 4) RWT 5) ITMN

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

- 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.

Bull Radar

Style Outperformer:

Small-cap Value (+2.92%)

Sector Outperformers:

Airlines (+6.63%), Restaurants (+3.60%) and Retail (+3.07%)

Stocks Rising on Unusual Volume:

QSII, DRL, TIN, INT, TTI, SNP, KALU, PDC, ATI, IPCM, ROCK, FSYS, BECN, MIDD, ENOC, COGT, LPNT, DTSI, TISI, HANS, CLDN, HTGC, NATI, KNDL, ISIS, FRED, WCRX, SPP, LYV, CYD, MTA, HRL, CEP, NFG and NZT

Stocks With Unusual Call Option Activity:

1) CPN 2) ATI 3) DECK 4) UBS 5) NUAN

Links of Interest

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Friday Watch

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%.

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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.