Today's Headlines

Bloomberg:
- Dennis Gartman, economist and editor of the Gartman Letter, sees crude oil falling to $80/bbl. on a stronger US dollar. (video)
- India's 10-year bonds fell for a second day after Prime Minister Manmohan Singh's economic advisory panel said inflation will accelerate from the fastest in more than 13 years. Benchmark yields climbed the most in two weeks after the panel said the central bank will need to keep monetary policy ``tight'' as inflation may quicken to as much as 13 percent in the coming months, the fastest since June 1992. India's central bank has increased the benchmark overnight lending rate three times in 2008 to a seven-year high.
- Crude oil futures rose more than $3 a barrel in New York after a U.S. Energy Department report showed a bigger-than-forecast decline in inventories of gasoline as refiners shut units and imports fell. Gasoline supplies dropped 6.39 million barrels to 202.8 million barrels last week, the biggest decline since October 2002 when Hurricane Lili and Tropical Storm Isidore disrupted output along the Gulf of Mexico. ``Refiners are cutting runs and imports plunged because demand is so weak,'' said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. Refineries operated at 85.9 percent of capacity, down 1.1 percentage point from the week before, the report showed. Petroleum-product imports fell 17 percent to 2.6 million barrels a day, the lowest since the week ended April 1, 2005, the report showed. U.S. fuel demand averaged 20.2 million barrels a day during the past four weeks, down 2.8 percent from a year earlier, the department said. Gasoline consumption averaged 9.4 million barrels a day over the period, down 1.9 percent from a year ago. U.S. motorists drove less in June for an eighth consecutive month, the Federal Highway Administration said. Vehicle-miles traveled fell 4.7 percent from a year earlier, the Washington- based agency said in a report today. The month's 12.2 billion- mile drop brought the total since November to 53.2 billion miles, the agency said.
- The U.K. pound slid to a 22-month low against the dollar and government bonds advanced after the Bank of England cut its growth forecast and held out the prospect of lower interest rates. The pound weakened for a ninth straight day as Bank of England Governor Mervyn King said he saw a ``chill in the economic air'' after unemployment rose in July by the most in almost 16 years. The currency's 5.9 percent decline since July 31 is its largest since February 1993, when Britain was emerging from two years of recession.
- The US dollar will appreciate against the euro, yen, pound and Swiss franc in the next six months as economies in Europe and Asia falter, a survey of Bloomberg users showed. The index of expectations on the dollar for U.S. users rose to 57.48 for August from 45.44 in July. A reading above 50 indicates participants expect the currency to appreciate.

MarketWatch.com:
- Toll Brothers(TOL), the nation's leading builder of luxury homes, today reported that, for the third quarter ended July 31, 2008, home building revenues were approximately $796.5 million, backlog was approximately $1.75 billion and net signed contracts were approximately $469.7 million. Robert I. Toll, chairman and chief executive officer, stated: "Our third-quarter results for revenues, contracts and backlog reflect the continued weakness in most of our markets. However, we believe there is growing pent-up demand from those who have postponed buying during the past three years. For example, when we run promotions and work the phones for a market, our rate of deposits improves significantly. "We believe the consumer's confidence in the housing market is the key to its recovery. Although the rate of cancellations as a percentage of our backlog remained quite elevated compared to our historical standards, total cancellations during the third quarter of 195 were the lowest quarterly total in over two years. We believe this reduction in cancellations is a positive sign. "With the passage of the Housing and Economic Recovery Act of 2008, Congress and the White House have offered a lifeline to many homeowners facing foreclosure, which should help keep more people in their homes and fewer distressed properties from coming on the market. And they have provided an incentive to new customers to move off the fence and become first-time buyers in a market that is very much in their favor. This may help to restore confidence in the market."

NY Post:
- T. Boone Pickens has been an oilman for nearly 60 years, but all that experience counted for little last month as the well-schooled octogenarian tycoon took a beating on oil and natural gas bets, The Post has learned. Sources say the commodity half of the legendary wildcatter's hedge fund BP Capital sank about 35 percent in July. "We notified our commodity-fund investors last week that the steep decline in natural gas and oil prices has had an adverse impact on our performance," a Pickens spokeswoman said in an e-mail.

Washington Post:
- Sovereign wealth funds, the massive investment pools run by foreign governments, are now among the biggest speculators in the trading of oil and other vital goods like corn and cotton in the United States, according to interviews with brokers who handle their investments at leading Wall Street banks, veteran traders and congressional investigators. The agency regulating the market said it had not picked up on this activity by sovereign wealth funds. In a June letter, the Commodity Futures Trading Commission told lawmakers that its monitoring showed that these funds were not a significant factor in commodity trading. But the CFTC is not detecting the growing influence of foreign funds because they invest through Wall Street brokers known as "swap dealers" who often operate on unregulated markets, sources familiar with the transactions said. The officials have ordered swap dealers to open their books and reveal to the agency more information about the unregulated activities of sovereign wealth funds and other financial actors, CFTC spokeswoman Ianthe Zabel said. The findings will be published in a report in mid-September, she said. The index allows investors to enjoy the returns of a commodity investment without actually buying futures contracts on an exchange. For this reason, the extent of their activities may be known only to the swap dealers at investment banks such as Goldman Sachs, Lehman Brothers and Morgan Stanley, which handle such transactions. About two dozen countries have established or are in the process of forming large funds, including Iran, Norway, Singapore, Kuwait, Australia, Russia and Libya.

Financial Times:
- Oil Prices Have Peaked. World oil consumption is now growing at a significantly lower pace than had been imagined a year ago. Last October, the International Energy Agency was forecasting global demand growth for 2008 of 2.1m barrels a day, with 750kb/d from the OECD and 1.33mb/d from emerging markets. In their latest monthly report, the IEA has slashed this by more than 60 per cent to 800kb/d, with OECD demand actually forecast to decline by over 600kb/d and emerging markets demand to grow by 1.4mb/d. In our judgment, the IEA's forecasts for emerging markets will turn out to have been far too optimistic by year's end and OPEC countries will again complain about the inability of oil importers to guarantee sufficient demand growth to warrant investments in expanded production capacity. For China, which has been responsible for more than half of global base metal demand growth and as much as one-third of global petroleum demand growth, challenging times are ahead for exporters and the metal and energy-intensive producers of steel, aluminum, cement, and other primary products.
- Indian electricity companies may delay $10 billion of projects as fund-raising becomes difficult, citing a report by London-based brokerage Arden Partners Ltd. India may fall short of adding 90,000 megawatts in capacity by 2012 as projects that need $6 billion in debt and $4 billion in equity may be delayed after interest rates rose and shares on stock markets declined.
- India's economic growth will slow to 7.7 per cent this fiscal year from 9 per cent in 2007 as high oil and food prices and tightening credit markets take their toll, a government panel forecast on Wednesday. The council also warned of mounting fiscal stress due to rising government subsidy bills for items as petroleum products and fertilizer, forecasting that off-budget liabilities would reach around 5 per cent of GDP.

Vedomosti:
- Mechel(MTL) may have to lower prices 30% in Russia.

China Daily:
- China will adjust consumption tax on vehicles as of September 1 this year to curb high-emission cars and promote small ones, according to a circular jointly issued by the Ministry of Finance and the State Administration of Taxation today. The country will raise the consumption tax on passenger vehicles with large engines and cut the consumption tax on low-emission passenger vehicles, in an effort to reduce pollution and save energy. According to the circular, the tax on big cars with an engine size of over 4 liters will rise to 40 percent from 20 percent. For those cars with engine displacement of between 3 liters and 4 liters (4 liters included), the tax will increase to 25 percent from current 15 percent.

Bear Radar

Style Underperformer:

Small-cap Value -1.11%

Sector Underperformers:

Airlines irlind (-7.76%), Banks (-3.50%) and Gaming (-3.16%)

Stocks Falling on Unusual Volume:

FOE, CMED, AMED, MPWR, CSIQ, PTEC, FSYS, UAUA, ADTN, BMRN, DE, RSH, GIL and LIZ

Stocks With Unusual Put Option Activity:

1) SOV 2) DFS 3) NMX 4) NVDA 5) FLEX

Import Prices Rise on Energy, Retail Sales Fall Slightly, Inventories Hit Record Low as Sales Jump

- The Import Price Index for July rose 1.7% versus estimates of a 1.0% gain and an upwardly revised 2.9% increase in June.

- Advance Retail Sales for July fell .1% versus estimates of a .1% decline and an upwardly revised .3% gain in June.

- Retail Sales Less Autos for July rose .4% versus estimates of a .5% increase and an upwardly revised .9% gain in June.

- Business Inventories for June rose .7% versus estimates of a .5% increase and a .4% gain in May.

BOTTOM LINE: Prices of goods imported into the US rose slightly more than forecast in July, Bloomberg reported. Food prices rose 1.5%, while the price of imported petroleum and petroleum products jumped 4.0%. Capital goods prices rose .3%, after a .1% decline in June. Prices of imported autos, parts and engines gained .1% in June. The CRB Index, the main source of inflation angst, has plunged 18.2% since July 2^nd. This should begin to show up in a meaningful way in August’s inflation numbers. The 10-year TIPS spread, a good gauge of inflation expectations, is only 1 basis point higher today to 2.15%, which is still the lowest since October 2003.

Sales at US retailers fell slightly in July for the first time in five months as record gas prices and tighter credit reduced auto purchases, Bloomberg reported. Excluding cars, sales rose .4%. Sales at auto dealers and parts stores dropped 2.4%. Gasoline use fell 2.1% to an average 9.07 million barrels a day through July, erasing five years of demand growth for the period, the American Petroleum Institute said today. Regular unleaded gasoline reached an average monthly record of $4.06 a gallon in July, according to AAA. The average price of gas nationwide has since fallen to $3.79/gallon as of today. Sales at furniture stores rose 1% in July, the most since January of last year. Electronics outlets saw sales gain .8%. I expect sales to improve modestly in August after the decline in gasoline prices.

Inventories at US businesses rose less than half as fast as sales in June, Bloomberg reported. Sales jumped 1.7%, the most since November. Companies had enough goods on hand to last 1.23 months at the current sales pace, the lowest since records began 16 years ago. Inventories at retailers fell .1% as sales rose .4%. Department store inventories fell .8%. Companies trimmed inventories in the second quarter at a $62 billion annual pace, the fastest decline since 4Q 2001. Despite this drawdown, 2Q GDP rose 1.9%. I still expect inventory rebuilding to help boost US economic growth above expectations during 3Q/4Q as demand surprises on the upside. As well, the GDP deflator will likely subtract less from nominal growth than expected over the intermediate-term on the decline in commodity prices. The Citi eurozone economic surprise index is now -173.50, while the US index is +40.0. The US Dollar Index is rising another .16% on today’s news. The 10-year yield is stable at 3.89%.

Bull Radar

Style Outperformer:

Small-cap Growth (+.19%)

Sector Outperformers:

Oil Service (+2.30%), Energy (+1.98%) and Steel (+1.49

Stocks Rising on Unusual Volume:

ALJ, PAAS, PHI, RNST, MHGC, CREE, NVDA, SAFT, EURX, ULTR, AFAM, PLCM, APEI, ARTC, FUQI, AMAT, OMRI, SSRI, FWLT, ATPG, VNUS, AUXL, DRYS, LDG, CEG and PDO

Stocks With Unusual Call Option Activity:

1) JEF 2) DE 3) ARO 4) RYL 5) CREE

Links of Interest

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- French President Nicolas Sarkozy said Georgia agreed to a modified plan to end fighting in the breakaway region of South Ossetia after the former Soviet republic's military was routed by Russia in a five-day war.
- CVS Caremark Corp.(CVS), the second- biggest U.S. drugstore chain, said it would buy Longs Drug Stores Corp. for $2.7 billion to expand its reach in the western U.S., closing the gap with larger Walgreen Co. Longs Drug has 521 locations in California, Hawaii, Nevada and Arizona, giving CVS about 6,800 stores, in line with Walgreen, the Deerfield, Illinois-based chain with 6,849.
- U.S. stocks pulled ahead of Brazil, Russia, India and China this week for the first time in 2008, spurred by the Federal Reserve's efforts to cut borrowing costs even as the biggest developing countries are raising theirs. the S&P 500's 12 percent loss this year leaves it ahead of Brazil's Bovepsa Index, whose drop through last week had been the smallest of the five countries. The U.S. equity benchmark claimed the lead after banks rallied 22 percent and the steepest monthly retreat in commodity prices sent the Bovespa into a bear market. ``You have the money on the move,'' said Michael Shaoul, chief executive officer of Oscar Gruss & Son Inc., a New York- based brokerage. ``So many people had cut their allocations to the United States that there was nowhere else to go. It's like a fire in an empty theater. If there's no audience, you're not going to find a stampede to the exit.'' The Bombay Stock Exchange's Sensitive Index dropped 25 percent in 2008, China's CSI 300 Index decreased 54 percent and Russia's benchmark RTS Index fell 21 percent. Brazil's Bovespa has lost 15 percent this year.
- China's stocks slumped for a fifth day, with turnover plunging to a 21-month low, on concern the bear market will deepen and as investors focused on the nation's Olympic gold medal tally in Beijing. The benchmark CSI 300 Index has tumbled 12 percent since the Games started on Aug. 8 in Beijing, to the lowest in 18 months. The value of stocks traded on the two primary exchanges yesterday fell 79 percent below the levels when the measure rose to a record on Oct. 16.
- Applied Materials Inc.(AMAT), the largest maker of chip-production machinery, forecast a rebound in new orders, signaling that a slump spurred by memory-chip companies may be nearing an end. The shares rose 4.5 percent in after-hours trading.
- Nvidia Corp.(NVDA), the second-largest maker of computer-graphics chips, posted its first quarterly loss in six years. The shares jumped 9.3% in late trading after the company said it boosted a share buyback program by $1 billion.
- Gold demand fell 19 percent in the second quarter as near-record prices and wide fluctuations in costs discouraged purchases from jewelers, the world's biggest users, the producer-funded World Gold Council said. Purchases for jewelry fell 24 percent and sales to India, the world's largest gold consumer and jewelry buyer, plunged 45 percent, the group said. India accounted for 27 percent of total gold demand in 2007. Demand in the Middle East dropped 12 percent, the Gold Council said. Investment in exchange-traded funds rose by 4 metric tons compared with a redemption of 2.6 metric tons a year earlier, the industry group said. It was still a 94 percent decline from the first quarter, when so-called ETFs attracted 72.7 tons of investment. Gold supply rose 1 percent from 797 tons to 802 tons, the council said. Central bank sales fell 43 percent to 88 tons and gold producers bought back 131 tons to eliminate hedge positions.
- Copper fell to a six-month low on speculation that a strengthening dollar will erode the appeal of metals as an alternative investment and as slowing industrial demand boosts stockpiles. The dollar gained 3.6 percent against the euro last week while copper slid 6.9 percent. Stockpiles in warehouses monitored by the London Metal Exchange rose to the highest since Feb. 14, jumping 39 percent from a one-year low on May 7. ``Copper stocks are up slightly today, and now seem to be pulling away from the 150,000-ton mark,'' Edward Meir, an analyst at MF Global Ltd. in Darien, Connecticut, said today in a report. ``Charts still look weak, and we see further downside, as is the case with most of the other metals.''
- Platinum fell to the lowest since December and palladium plummeted on speculation that the dollar will climb higher against the euro, eroding demand for metals as an alternative investment. ``The dollar continues to be the main driver of the markets,'' Miguel Perez-Santalla, a sales vice president at Heraeus Precious Metals Management in New York, said today in a note. Some currency traders ``are still insisting that the dollar should correct to as low as $1.44 per euro, so if this will come to fruition, it would no doubt drive the entire precious-metals complex significantly lower.'' If there is ``better news for the dollar, watch out: That knife will be dropping quickly.''
- Japan's economy contracted last quarter, bringing the country to the brink of its first recession in six years, as exports fell and consumers spent less. Gross domestic product shrank an annualized 2.4 percent in the three months ended June 30 after expanding a revised 3.2 percent in the first quarter, the Cabinet Office said today in Tokyo.
- Apollo Global Management LLC, the private-equity firm run by Leon Black and Joshua Harris, had a net loss of $96.4 million in the quarter ended March 31 as it moves forward with a listing on the New York Stock Exchange.
- Russia's RTS stock index is turning into the world's worst performer this quarter as tumbling oil, a war in Georgia and the probe of a steel company remind investors owning shares in the former Communist nation can be perilous. The RTS fell 22 percent since June 30, even after President Dmitry Medvedev halted the invasion of Georgia yesterday, sending the index up 3.5 percent. The retreat this quarter is the steepest among indexes in the world's 20 biggest stock markets, according to data compiled by Bloomberg.

Wall Street Journal:
- Alarm over the price of oil has sparked controversy over the role of "speculators." But it's an unusual and damaging price spike this year in a different commodity, cotton, that has market watchers scratching their heads.

MarketWatch.com:
- Many borrowers are starting to pay less interest and being given more time to pay their mortgages.

CNBC.com:
- Home Prices Start to Show Signs of a Turnaround. "Anybody who tells you they know when the housing market will bottom is delusional, but anybody who denies there are some positives out there that could make the housing market bottom fairly soon is equally delusional," said Karl Case, the co-developer of a widely watched gauge of the housing industry and an economics professor at Wellesley College in Massachusetts. Residential construction as a percentage of real gross domestic product is below the historical bottom, Case noted. Case, whose research has focused on real estate markets and prices for over 20 years, said certain regions of the country now look similar to when they bottomed in past down cycles.
- What Financial Stocks Are Shorted the Most?

NY Times:
- Gains Seen in Curbing Short Sales.

BusinessWeek.com:
- Inflation Fears Batter Chinese Stocks. With the Shanghai stock index tumbling 60% since last October, Chinese investors are desperate to find a silver lining. The U.S. economic slump, combined with Chinese government measures aimed at popping an equities bubble and containing runaway growth, have taken their toll on many of China's most prominent blue chips.

Fox Business Network:
- The number of foreclosures in the US is growing and policy makers are taking steps to reduce the damage to the economy, Federal Reserve Bank of Boston President Eric Rosengren said. “Looking for ways to be able to address this with large numbers of people is exactly what we’re doing.”

IBD:
- Varian Medical(VAR): New Products Drive Growth For Medical Imaging.

USA Today.com:
- US power grid in better shape 5 years after blackout.

Reuters:
- UN Peacekeepers may have committed sex abuse in Congo.
- House Republican Leader John Boehner on Tuesday urged House Speaker Nancy Pelosi to call lawmakers back into session to pass a bill expanding drilling in federal waters, now that she was willing to permit a vote on such a measure.Reversing her position, Pelosi said she was willing to schedule a vote in the House of Representatives on legislation to expand offshore drilling, if the bill addressed other energy issues, such as extending tax credits for solar and wind energy and releasing oil from the Strategic Petroleum Reserve.
- Fed still worried about inflation despite oil retreat.
- Best Buy Co Inc (BBY) will be the first national retailer to sell Apple Inc's (AAPL) iPhone in the United States in a partnership that could help drive sales of a device expected to be one of the hottest gadgets this holiday season.

Financial Times:
- OPEC last month pushed its production to the highest level in its 48-year history even as demand was slipping in the US and Europe, the International Energy Agency (IEA) said on Tuesday. Opec's output in July was about 1m b/d higher than in April and significantly higher than the 31.1m b/d in the same month of last year. The IEA cut its global oil demand growth to 790,000 barrels a day, down from July's estimate of 890,000 b/d. Some of the demand in rich countries will be lost for ever, it noted, saying: "Even if retail prices ease, it seems unlikely that motorists who have purchased smaller cars will revert to gas-guzzling vehicles."

Daily Times:
- Pakistan’s President Pervez Musharraf may announce his decision to resign tomorrow.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (GKSR), target $42.
- Rated (PHM) Buy, target $16.
- Rated (TOL) Buy, target $27.

Bank of America:
- Rated (COV) Buy, target $59.
- Rated (BEAT) Buy, target $43.
- Rated (ABMD) Buy, target $30.

Night Trading
Asian Indices are -2.0% to -.25% on average.
S&P 500 futures -.04%.
NASDAQ 100 futures +.06%.

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Earnings of Note
Company/EPS Estimate
- (DE)/1.37
- (M)/.19
- (LIZ)/.00
- (DPS)/.55
- (IPI)/.33
- (NTAP)/.22

Upcoming Splits
- (TWI) 5-for-4

Economic Releases
8:30 am EST
- The Import Price Index for July is estimated to rise 1.0% versus a 2.6% increase in June.
- Advance Retail Sales for July are estimated to fall .1% versus a .1% increase in June.
- Retail Sales Less Autos for July are estimated to rise .5% versus a .8% increase in June.

10:00 am EST
- Business Inventories for June are estimated to rise .5% versus a .3% gain in May.

Other Potential Market Movers
- The weekly MBA mortgage applications report, EnerCom Oil & Gas Conference, Jeffries Industrials Summit, CSFB Electrical Equipment/Machinery Conference, JPMorgan Auto Conference and the CanaccordAdamas Growth Conference could also impact trading today.

BOTTOM LINE: Asian indices are lower, weighed down by commodity and insurance shares in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.