Thursday Watch

Late-Night Headlines
Bloomberg:
- Greg Salvaggio, vp of capital markets at Tempus Consulting, sees the US dollar rising to $1.35 versus the euro. (video)
- China's industrial-output growth cooled in July to the slowest pace since February 2007 as the country capped factory production ahead of the Olympic Games to clear the air. Production rose 14.7 percent in July from a year earlier, the statistics bureau said today, after gaining 16 percent in June. ``China's manufacturing sector is facing tough challenges due to the global slowdown, rising production costs, tight credit conditions, power shortages and currency appreciation.'' Producer prices jumped 10 percent in July from a year earlier, the fastest pace since 1996. Wages in Chinese urban areas rose 18 percent in the first half to 12,964 yuan.
- The world’s coal, grain and ore shippers, after the longest losing streak since 2005, may face another two years of declines as the fleet expands and slower global growth curbs demand for raw materials. The Baltic Dry Index fell for 23 consecutive days through August 12. The index will average 40% less next year and sink another 47% in 2009, according to Goldman Sachs Group(GS). “What we have is a classic cyclical downturn,” said Andreas Vergottis, research director at Tufton Oceanic Ltd., the world’s largest shipping hedge fund manager. “People are not buying cars and people are not buying houses, and when that stops, it travels backwards all the way back to the mine.” Slowing growth comes as shipyards have almost as many capsize vessels on order as already exist in the fleet, Goldman said. “There’s been a genuine downturn in demand from key areas, in particular China,” said Steve Rodley, a shipping hedge fund manager at M2M Management Ltd. in London.
- The U.S. presidential race is a tossup as Democratic presidential candidate Barack Obama has lost what was once an eight-point lead over Republican rival John McCain, according to a new poll. The Washington-based Pew Research Center for the People and the Press said today that Obama now leads McCain 46 percent to 43 percent among registered voters, down from June when the Illinois senator enjoyed a 48 to 40 advantage. Obama has made ``no significant headway'' among Hillary Clinton's former supporters, with 72 percent of them saying they now back Obama. That's unchanged from last month and 3 percentage points higher than in June, Pew said.
- Lehman Brothers Holdings Inc.(LEH) seeking to restore investor confidence after a $2.8 billion second-quarter loss, is negotiating to sell commercial real estate assets to a group including BlackRock Inc.(BLK), said three people briefed on the discussions. Lehman is seeking to sell about $14 billion of its $40 billion in commercial property and related securities by the end of the year, according to two potential buyers approached by the New York- based firm.
- Europe's economy probably contracted in the second quarter for the first time since the launch of the euro almost a decade ago, a survey of economists shows.
- Australia's central bank is in a position to cut interest rates from a 12-year high because consumers have trimmed spending enough to cool the economy and inflation, said Deputy Governor Ric Battellino. ``We cannot wait to see a fall in inflation before we start cutting rates because by then it would be too late,'' Battellino told a parliamentary committee in Sydney today.

Wall Street Journal:
- Tiger Woods to Become First Billionaire Athlete.
- Bush Orders Humanitarian Aid For Georgia, Sends Rice to Tbilisi.
- Intel Corp.(INTC) has developed technology to remotely power up personal computers, letting users retrieve files over an Internet connection.
- Mitsubishi UFJ Financial Group Inc. may buy a bank in the US or other countries outside Japan, aside from its $3 billion offer to gain full control of its California unit. The bank could spend “several billion dollars” to acquire a regional or commercial lender in the US, citing analyst. Salt Lake-based Zion Bancorp.(ZION) and Dallas-based Comerica Inc.(CMA) are targets that would enable the bank to benefit from growth in other US states, citing JPMorgan.

MarketWatch.com:
- As boomers age, progress on Alzheimer’s front. Pipeline has new drugs that show promise in halting disease’s progression.
- Ford Motor Co.(F), struggling as sales of gas-chugging trucks and SUVs suffer, plans to use its new Focus model to speed its transition into the small-car market, the company said Wednesday.

CNBC.com:
- The rest of the world's economic pain could mean American gain as investors once again place their trust in the US stock market. In a year when investors have increasingly shied away from companies that do most of their business domestically, a downturn in European and Asian economies coupled with a turnaround in the dollar looks to reverse that trend. A Merrill Lynch survey on Wednesday showed fund managers concerned about economic slowdowns around the world and favoring US assets for investment.

NY Times:
- The rapid growth in advertising and traffic to Web sites aimed primarily at women has attracted the attention of major media companies and venture capitalists.

CNNMoney.com:
- The American Petroleum Institute says oil and gas demand sank in the first half of 2008, marketing the first significant decline in 17 years.

AP:
- Whites will no longer make up the majority of people in the US by 2042, eight years earlier than previous estimates, citing Census Bureau figures released today. Forty-six percent of the population will be white by 2050, with the Hispanic representation doubling to 30%. Increased immigration and higher birth rates among Hispanics has sped up population diversity, AP said.

unicef:
- Russia, Georgia Conflict Displaces 100,000 People.

dailybreeze:
- Stay bullish on biofuels. Cellulosic ethanol is poised to play a greater role in the economy of Los Angeles County. The county Planning Commission last month approved a proposal to build the county's first ethanol plant near a landfill in Lancaster. The $30 million plant, which has been designed by Irvine-based BlueFire Ethanol, would be the first commercial facility in the nation to process ethanol from biowaste such as woodchips, grass cuttings and other organic materials. The plant would produce clean-burning ethanol that could be added to gasoline or used as an alternative fuel. Another benefit of this technology is that it doesn't require a lot of water to operate. The plant will use water recycled from the continuous use of biowaste.

BusinessWeek.com:
- Best Buy(BBY) Deal Expands iPhone’s Retail Footprint. For U.S. market in particular, this would expand the iPhone’s retail presence substantially to nearly 3,200 locations in the U.S. Apple has 188 of its own retail stores in the US, while AT&T operates some 2,000 stores. Assuming it can keep up with demand, Apple is on track to sell nearly 4.5 million iPhone in the current quarter, says Piper Jaffray analyst Gene Munster in a research note published today. Munster carried out a survey counting sales of phones at Apple stores around the U.S. “We estimate that Apple sells an average of 95 iPhone 3Gs per day at each of its 188 retail stores, up from 21 phones per day a year ago,” Munster wrote.

Reuters:
- Spending on online ads overtook advertising on mainstream TV in Britain last year, growing 40 percent to 2.8 billion pounds ($5.3 billion) and accounting for 19 percent of all advertising, UK regulator Ofcom said. In its annual report on Britain's 51 billion-pound communications industry, the watchdog found that Britons spent four times as much time on computers, or 24 minutes a day, and twice as much time on mobile phones in 2007 as in 2002.

Financial Times:
- The battle between Toyota (TM) and Honda (HMC) for supremacy in the hybrid petrol-electric car market is set to heat up with both Japanese carmakers set to introduce distinctive new models early next year. Honda disclosed details on Wednesday of a hybrid hatchback that will be smaller and cheaper than its existing Civic hybrid sedan.Toyota is due to unveil a larger version of its popular Prius.
- A consortium of the biggest US cinema chains is closing in on a $1bn deal that will pave the way for a new generation of money-spinning 3-D movies, after securing provisional backing from three key Hollywood studios. Walt Disney and Paramount Pictures are on the verge of signing a contract with Digital Cinema Implementation Partners, a consortium made up of the AMC, Regal and Cinemark chains, according to people familiar with the situation.

CBCnews:
- HSBC Holdings PLC, the world's largest bank, is considering ditching the BlackBerry in favor of the iPhone, according to an Australian report, a move that would be a huge blow to Waterloo, Ont.-based Research In Motion Ltd.(RIMM) Brenton Hush, chief information officer for HSBC in Australia and New Zealand, on Tuesday said the bank was looking at rolling out Apple Inc.'s(AAPL) iPhone across its worldwide workforce of 300,000. Apple made the 3G iPhone compatible with Microsoft Exchange servers, thus making the device a serious contender to the BlackBerry for business users. RIM co-chief executive officer Jim Balsillie has repeatedly said the iPhone is good for his company's business as the device raises the profile of all "smartphones."

Nikkei:
- The Bank of Japan may lower its economic assessment when it holds a policy board meeting next week. The central bank, which said last month that economic growth was “slowing further,” will probably lower its views on exports, production and consumer spending.

Straits Times:
- Singapore promised help for its poor as the economy slows, citing Minister Mentor Lee Kuan Yew. Some workers in Singapore may be fired as demand for exports to Europe and America slows, citing Lee.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (BRCD), target $9.
- Reiterated Buy on (DE), boosted estimates, lowered target to $91.
- Downgraded (SGR) to Sell, target $50.
- Replaced (AOC) with (AIZ) in Top Picks Live list.

Night Trading
Asian Indices are -.25% to +1.25% on average.
S&P 500 futures +.19%.
NASDAQ 100 futures +.22%.

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Earnings of Note
Company/EPS Estimate
- (URBN)/.29
- (RRGB)/.49
- (KSS)/.73
- (A)/.53
- (HAR)/.76
- (SJM)/.76
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- (ADSK)/.52
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- (EL)/.56
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- (IRF)/-.19

Upcoming Splits
- (TWI) 5-for-4

Economic Releases
8:30 am EST
- The Consumer Price Index for July is estimated to rise .4% versus a 1.1% gain in June.
- The CPI Ex Food & Energy for July is estimated to rise .2% versus a .3% gain in June.
- Initial Jobless Claims for this week are estimated to fall to 435K versus 455K the prior week.
- Continuing Claims are estimated to fall to 3310K versus 3311K prior.

Other Potential Market Movers
- The Fed’s Stern speaking, weekly EIA natural gas inventory report, JPMorgan Auto Conference, EnerCom Oil & Gas Conference and the CanaccordAdams Growth Conference could also impact trading today.

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

Stocks Finish Lower, Weighed Down by Bank, Airline and Gaming Shares

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In Play

Stocks Mostly Lower into Final Hour on Jump in Commodities, Global Growth Worries, Financial Sector Pessimism

BOTTOM LINE: The Portfolio is about even into the final hour as gains in my Computer longs, Medical longs and Software longs offset losses in my Commodity shorts, Retail longs and Gaming longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is mildly positive as the advance/decline line is slightly higher, sector performance is mixed and volume is about average. Investor anxiety is above average. Today’s overall market action is mildly bullish. The VIX is falling .57% and is still above-average at 21.04. The ISE Sentiment Index is very low at 93.0 and the total put/call is above average at 1.02. Finally, the NYSE Arms has been running above average most of the day and is currently .96. The Euro Financial Sector Credit Default Swap Index is rising 3.18% today to 81.17 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 4.3% today to 135.50 basis points. The TED spread is rising 1.09% to .96. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 1 basis point to 2.15%, which is the lowest since October 8, 2003 and down 48 basis points in less than six weeks. Given the 2.1% decline in the (XLF) and rise in commodities, the Nasdaq is trading very well again. I think the Naz will lead another broad market surge higher over the coming weeks as financials stabilize. Small-cap shares, specifically small-cap growth, are especially strong again today. The Russell 2000 is only 1.4% lower for the year and has rallied 17.0% since its low on March 10^th. I suspect small-caps will continue to outperform over the intermediate-term. Today’s rise in oil looks like short-covering to me. Gasoline supplies are falling because refiners are operating at record low levels for this time of the year due to poor demand for gas. The US dollar continues to trade very well and is likely just consolidating recent gains before another surge higher. Nikkei futures indicate a -8 open in Japan and DAX futures indicate an +65 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering and bargain-hunting.

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%.