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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Former Virginia Governor Mark Warner, now running for the U.S. Senate, called for an end to the congressional ban on offshore drilling for oil and gas. ``I think we have to lift the congressional moratorium on drilling and it's got to be part of the portfolio,'' Warner said. Drilling should be one element of a broad energy plan that also includes alternative energy sources, nuclear power and coal, Warner, 53, said during an interview on Bloomberg Television. Democrats have been under increasing pressure to allow offshore drilling as Republicans push the issue as a way to lower gas prices. Mark Warner is scheduled to give the keynote address at the Democratic National Convention next week and is to campaign tomorrow in Virginia with presumptive Democratic presidential candidate Barack Obama. He said that he would not accept an invitation to join the ticket as vice president.
- Hewlett-Packard Co.(HPQ), the world's largest personal-computer maker, reported a 14 percent increase in third-quarter profit, beating analysts' estimates, as international demand and new notebook designs spurred sales. The shares rose as much as 4.4 percent in after-hours trading.
- Barack Obama and John McCain are locked in a tight battle for president. With the nominating conventions set to begin next week, Illinois Senator Barack Obama edges Arizona Senator John McCain 42 percent to 41 percent among registered voters, according to the latest Bloomberg/LA Times poll.
- Gold, down 21 percent from a record $1,033.90 an ounce in March, may be headed down after open interest in New York futures contracts for the precious metal plunged to the lowest level in 11 months. Open interest reached 365,611 on Aug. 12, down 26 percent from a four- month high on July 18 and the lowest since Sept. 10. Commercial users of the metal, including investors or mining companies, also have reduced their bets on price gains to the lowest since September. Net-long positions fell by 20 percent from a week earlier to 130,660 contracts on Aug. 15, the biggest drop and the lowest level since September. ``An outflow of passive and active investment money'' means ``it is hard to be positive about the out for precious metals over the next month or so,'' John Reade, the head of UB AG metals strategy in London.
- This year's drop in agricultural stocks, whose rally since 2003 outpaced the gains in technology shares that preceded the dot-com crash, may deepen as the economic slowdown reduces profits, according to Citigroup Inc. ``Investors have been stung of late in farm equipment and fertilizer stocks, but more pain could be coming,'' Tobias Levkovich, Citigroup's chief U.S. equity strategist, wrote in a research note on Aug. 18. ``There are significant cracks in the agricultural economy story. We have been very anxious that investors had gotten carried away with the global growth theme.'' Note the 842 percent rise in the agricultural index during the five-year period before its peak in June. That surpassed the 755 percent gain in the S&P 500 technology index from March 1995 to March 2000, when the industry and the rest of the U.S. stock market began a 2 1/2-year descent. Levkovich wrote that he's ``worried about what has been dubbed the `dot-corn' stocks relative to the dot-com names of the late 1990s.'' Low price-to-earnings ratios for agricultural shares ``should not provide any valuation comfort since that often reflects the market's ability to sniff out the likelihood of peak earnings,'' the New York-based strategist wrote.
- Chevron Corp.(CVX) resurrected plans to tap a 700 million-barrel oil field off Canada's east coast more than two years after the project collapsed amid a dispute with the provincial government over ownership stakes. Hebron's reserves would be worth about $80.3 billion at current oil prices. The field could supply every refinery on the U.S. East Coast for more than 16 months.
- A higher percentage of Wall Street job applicants passed the final test in a three-step process that may give them a hiring edge as the financial-services industry cuts jobs at the fastest pace in at least five years. Fifty-three percent passed the third stage of the Chartered Financial Analyst test, up from 50 percent last year, the CFA Institute said in a statement today. A record 92,081 people took the exam in June, including 14,569 who cleared two preliminary exams to qualify for the test that lets them obtain CFA designation, the Charlottesville, Virginia-based institute said.
- VeriFone Holdings Inc.(PAY), the biggest maker of electronic-payment equipment, soared 33 percent in extended trading after restating previous results and forecasting 2009 sales and profit that beat analysts' estimates.
- A worldwide food crisis that sent wheat, corn and rice prices to records and sparked riots earlier this year may be over after farmers boosted plantings, a top official in India's food ministry said. ``I don't think there's a crisis now,'' said T. Nanda Kumar, the country's food secretary, who is responsible for formulating food security policy in the world's second-most populous nation. ``Food will be available.''
- The Philippines cut its 2008 economic-growth forecast for the second time this year as faster inflation hurt consumption, adding pressure on the government to boost spending on food and fuel subsidies to the poor.

Wall Street Journal:
- Been Riding the Russian Boom? It’s Time to Cash In Your Chips. At the last count, ordinary Americans had more than $3 billion at stake in mutual funds that invest in Vladimir Putin’s Russia. Recent events in central Asia show why they’re playing with fire. The risks in that country are far greater than most ordinary investors realize. And at current prices, shareholders aren’t being paid enough to take them.
- Mortgage giant Freddie Mac(FRE) was forced to offer unusually rich terms to investors in a $3 billion auction of its debt, raising anew concerns that the Treasury Department might be forced to intervene to prop up a company that is vital to the housing market.
- Dubai Corporate Probes Grow As Emirate Tightens Oversight. A police dragnet continues to widen among senior corporate executives here, in what appears to be a concerted push by government officials to put the shine back on this Mideast boomtown's damaged reputation.
- India's information-technology industry, the engine of the nation's economic resurgence, is losing steam.

MarketWatch.com:
- China has increased its power prices for the second time in two months, raising on-grid rates by about 5% to head off a looming power crisis. The National Development and Reform Commission said on its Website that the move would take effect Wednesday, and analysts said more such moves are likely ahead. "Beijing will raise power rates and fuel prices again this year. The government may also find other ways to support power producers to ensure stable power supply," said Merrill Lynch economist Ting Lu in a research note Tuesday.
- Music to a bull’s ears. Corporate insiders still buying stocks at an above-average rate. Another bullish straw in the wind is insiders' behavior since the stock market's July 15th bottom. Contrary to the normal pattern, in which insiders markedly pick up the pace of their selling as the market rises, insiders over the past five weeks they have only slightly increased that pace. It is an encouraging sign that insiders did not use the occasion of the recent rally to sell more of their shares.

CNNMoney.com:
- 10 cool tools for your mobile phone.

Alpha:
- Daniel Loeb, CEO of the $5.6 billion New York–based activist hedge fund firm Third Point, has revealed in a letter to investors that his funds had suffered from a sharp reversal in energy and financial stocks during the first three full weeks of July, sustaining losses “in the high single digits” that effectively erased all of its gains for the quarter. (The Third Point Partners Fund was up 8 percent for the second quarter and 3.6 percent for the year before its July troubles.) In addition, Loeb disclosed in his July 25 second-quarter investor letter, a copy of which has been obtained by Alpha, that the Securities and Exchange Commission has begun a formal investigation into Third Point’s communications with portfolio managers at other hedge funds.

BusinessWeek.com:
- The Next Software Power? Peoplesoft founder Dave Duffield is building another software upstart that is attracting a lot of attention.

Financial Times:
- Barclays would consider buying a US wealth management company but is "highly unlikely" to bid for an investment bank, even with the depressed share prices of many Wall Street firms, Bob Diamond, the bank's president, said on Tuesday.

TimesOnline:
- Hedge funds at a loss to cope with mood swing. Investors are facing huge losses as hedge funds have been wrongfooted by change in market sentiment over the summer. The United States-based Pequot Global Fund is believed to have been badly hit, with one expert claiming that the fund suffered a “significant double-digit” percentage loss in July, which Pequot refused to comment on. For months hedge funds made money positioning themselves for energy prices and mining stocks to rise and financials to fall. But that trend reversed in July. Similarly, the US dollar regained investor popularity two weeks ago, badly burning anyone positioned for it to remain weak. John Godden, a hedge fund consultant with IGS Group, said: “Commodity trading funds, which had a storming year till June, have been hit by the falls in energy prices. They make money on trends and when trends unwind, they lose money.” Mr Godden said that other hedge funds were doing well, with merger arbitrage funds and dedicated short sellers “making out like bandits”.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (FSLR), target $450.
- Reiterated Buy on (OMTR), target $30, added to Top Picks Live list.
- Reiterated Buy on (SPLS), raised estimates and boosted target to $32.

Night Trading
Asian Indices are unch. to +1.25% on average.
S&P 500 futures +.28%.
NASDAQ 100 futures +.35%.

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Earnings of Note
Company/EPS Estimate
- (BJ)/.57
- (ROST)/.54
- (EV)/.46
- (LTD)/.20
- (GYMB)/.25
- (BYI)/.54
- (LDG)/.76
- (PVH)/.65
- (CRM)/.08
- (SNPS)/.39

Upcoming Splits
- (ALXN) 2-for-1

Economic Releases
10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil build of 1,000,000 barrels versus a -316,000 barrel drawdown the prior week. Gasoline supplies are expected to fall by 3,000,000 barrels versus a 6,394,000 barrel decline the prior week. Distillate inventories are expected to rise by 1,000,000 barrels versus a 1,759,000 barrel decline the prior week. Finally, Refinery Utilization is expected to rise .35% versus a 1.06% decline the prior week.

Other Potential Market Movers
- The weekly MBA mortgage applications report could also impact trading today.

BOTTOM LINE: Asian indices are mostly 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 Airline, Gaming, Retail and Financial Shares

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In Play

Stocks Lower into Final Hour on Financial Sector Pessimism, Credit Angst, Rising Commodities

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Alternative Energy longs, Gaming longs and Commodity shorts. I have not traded today, thus leaving the Portfolio 75% net long. The tone of the market is negative as the advance/decline line is substantially lower, almost every sector is falling and volume is light. Investor anxiety is above average. Today’s overall market action is bearish. The VIX is rising 3.4% and is still above-average at 21.69. The ISE Sentiment Index is below-average at 118.0 and the total put/call is high at 1.16. Finally, the NYSE Arms has been running around average most of the day and is currently .96. The Euro Financial Sector Credit Default Swap Index is rising 10.0% today to 88.25 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 5.0% today to 141.34 basis points. The TED spread is falling 2.86% to 1.02. The 10-year TIPS spread, a good gauge of inflation expectations, is unch. at 2.16%, which is the lowest since October 14, 2003 and down 47 basis points in about six weeks. The (XLF) is down 2.44% on the day, but bottomed around noon and has since trimmed losses, while the broad market recently made a new low. I wouldn’t be surprised to see some short-covering in the (XLF) into the close. The fact that volume remains very anemic during the recent pullback is a positive, in my opinion. (HPQ) reports after the close. While I am not long the stock, its report should be received positively by investors, which could help boost the Nasdaq tomorrow. Nikkei futures indicate a -115 open in Japan and DAX futures indicate an +15 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:
- NATO downgraded ties with Russia to protest the invasion of Georgia, struggling to go beyond verbal condemnation of Russia's first foreign military campaign since the collapse of the Soviet Union. ``There can be no business as usual with Russia under present circumstances,'' Secretary General Jaap de Hoop Scheffer told reporters after allied foreign ministers met in Brussels today. He ruled out NATO-Russia meetings ``as long as Russian forces are basically occupying a large part of Georgia.''
- Medtronic Inc.(MDT), the world's second- largest device maker, said earnings beat analysts' estimates, driven by sales of a new heart stent and reductions in jobs and expenses.
- Venezuela's government extended its hold on the economy with accords to take majority stakes in the local units of cement companies Lafarge SA and Holcim Ltd., and by seizing Cemex SAB's factories.
- Macau casino owners Las Vegas Sands Corp.(LVS), Wynn Resorts Ltd.(WYNN), MGM Mirage(MGM), and Melco Crown Entertainment Ltd. fell in New York trading after a report that China may increase travel curbs to the gambling center.
- Crude oil is rising $.98/bbl. on investment fund short-covering ahead of tomorrow’s EIA energy inventory data and a weaker US dollar.
- Russia's RTS Index fell to its lowest in almost two years and posted today's biggest drop among equity indexes tracked by Bloomberg as lower energy prices dragged down oil and gas producers. OAO Rosneft, Russia's biggest oil company, fell to its lowest in almost five months, and OAO Gazprom, the world's largest natural-gas producer, slid the most in seven months. The dollar-denominated RTS dropped 5.6 percent to 1,678.16 at 5:06 p.m. in Moscow, the lowest since November 2006. The RTS has plunged 32 percent from its May 19 high on concern that the outlook for earnings at commodity producers, which dominate the index, is weakening amid a global economic slowdown. The index also fell when Prime Minister Vladimir Putin attacked coal and steel producer OAO Mechel for its raw materials pricing and on Russia's invasion of Georgia on Aug. 8. ``Russia is overloaded with people trying to exit,'' said James Beadle, portfolio manager at Pilgrim Asset Management in Moscow.

Wall Street Journal:
- Russia Is Still a Hungry Empire.

NY Times:
- 18 New NYC Charter Schools to Open in September, Bloomberg Announces.
- Running a Hedge Fund Is Harder Than It Looks on TV.

The Detroit News:
- College presidents from about 100 of the nation's best-known universities, including Duke, Dartmouth and Ohio State are calling on lawmakers to consider lowering the drinking age from 21 to 18, saying current laws encourage dangerous binge drinking on campus.

The Washington Post:
- Barack Obama has proposed giving NASA an extra $2 billion, promising to make space exploration a higher priority if elected.

Reuters:
- Apple Inc.(AAPL) has released a software update for the iPhone following customers’ complaints that the handsets were losing connections. The software became available for download today.
- The top U.S. securities regulator plans to propose new short selling rules in the next few weeks. U.S. Securities and Exchange Commission Chairman Christopher Cox said on Tuesday that the proposal "will focus on market-wide solutions" but is not intended to have any impact on the direction of prices. Cox also said fails to deliver "were reduced substantially" for the stocks covered under the SEC's recent emergency short selling rule.
- China's huge state banks are poised to report strong profit growth for the first half in 2008, thanks to wider margins and strong fee income, but funding costs are expected to rise in the second half, eroding growth. Chinese lenders are likely to face a harder time for the rest of the year and beyond as customers lock up funds in time deposits and move away from more profitable demand deposits, and as a weak stock market dents enthusiasm for investing in shares. Asset quality is expected to deteriorate as property firms are hit by Beijing's clampdown on borrowing and exporters are squeezed by a weakening U.S. economy and higher costs.

Financial Times:
- Swiss central bank President Jean-Pierre Roth said the economy is slowing more than policy makers had expected and that inflation should ease as the price of oil declines.

International Herald Tribune:
- A new study by the International Monetary Fund could fuel an uneasy feeling already stirring in financial markets that some Asian central banks are drawing down their currency reserves a bit too fast for comfort. In a challenge to conventional wisdom, including that of the Fund, two IMF researchers say the huge war chests in most Asian countries are not too big in light of the potential for international capital flows to come to a screeching halt.

AFP:
- Seven Russian armored vehicles, three tanks and other military vehicles today left the Georgian city of Gori, near the separatist region of South Ossetia.

Canadian Business Online:
- Hedge fund operator Paul Eustace, a Canadian who controlled Philadelphia Alternative Asset Management, has been ordered to pay more than US$279 million to defrauded customers and more than US$12 million in civil penalties.

The Manila Times:
- PHILIPPINE economic managers have revised downwards the country’s economic growth goal while raising its inflation target this year owing to costlier food and fuel, government sources said.

Arab Times:
- Kuwait’s government approved measures to control prices of goods in the Gulf state. The plans include increasing subsidies for Kuwaitis and capping prices of goods sold at co-operative societies. Kuwaiti inflation accelerated to a record 11.4% in April and slowed to 11.1% in May.

National:
- Aldar Properties PJSC, Abu Dhabi’s biggest developer, plans to restrict resale of its properties to discourage speculation.

Bear Radar

quzStyle Underperformer:

Small-cap Value -1.85%

Sector Underperformers:

Gaming irlind (-5.87%), Airlines (-5.69%) and Retail (-3.06%)

Stocks Falling on Unusual Volume:

NGLS, ANW, VIP, TWI and AIN

Stocks With Unusual Put Option Activity:

1) SPLS 2) AMLN 3) NRG 4) NCC 5) SLM