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Tuesday Watch

Late-Night Headlines
Bloomberg:
- The US dollar's rally over the past month is ``close to unprecedented'' in the 35 years since the currency was decoupled from gold and will have room to rise on bets the European Central Bank will begin cutting borrowing costs, according to Lehman Brothers Holdings Inc. The four-week rate of change in the Federal Reserve's trade-weighted U.S. dollar index as of Aug. 15 was 6.3%, the second-largest increase since 1973. ``The ECB is going to start cutting early next year -- in January,'' said Steven Englander, a currency strategist at Lehman in New York. ``Right now, the first ECB cut isn't priced in to the market until July. We are significantly more aggressive in terms of thinking how the ECB is going to respond to weaker growth and lower inflation.''
- The euro traded near a six-month low against the dollar before a report forecast to show business confidence in Germany declined this month to the lowest level in almost three years. The euro was also near a three-month low versus the yen as traders pared bets the European Central Bank will raise interest rates this year. ``There's a good chance for the euro to go lower,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``People are giving up on bets for euro gains as the chance of an ECB rate hike fades away.''
- Investors should sell the New Zealand dollar as the drop in global commodity prices slows the nation's economic growth, according to Standard Chartered Plc. The New Zealand dollar is likely to fall 1 percent to 69 U.S. cents by year-end, compared with a previous estimate of 71 cents, as the slowdown intensifies, according to Standard Chartered. ``The recent correction in global commodities is the straw that has broken the camel's back,'' New York-based currency strategist Mike Moran and Singapore-based Callum Henderson wrote in a research note yesterday. Fund managers should reduce their New Zealand dollar-denominated holdings to ``underweight'' from ``neutral,'' they wrote.
- Symantec Corp.(SYMC), the biggest maker of security software, may meet or surpass its forecast this quarter as customers buy more information-protection products from fewer suppliers, Chief Executive Officer John Thompson said.
- Walt Disney Co.'s(DIS) ESPN cable network bought the rights to air basketball and football games of the Southeastern Conference until 2024, seizing on the popularity of one of the most successful U.S. collegiate sports leagues. ESPN will pay $2.25 billion, or about $150 million a year, the Sports Business Journal reported today. Starting next year, the ``SEC on ESPN'' brand of programming will be broadcast on ESPN, ABC, ESPNU and other channels and will include baseball, Bristol, Connecticut-based ESPN said today in a statement.
- Empresas ICA SAB, Mexico’s largest construction company, fell to the lowest in 15 months as analysts said slowing economic growth will hurt building demand. ICA shares have fallen 36% this year. Government spending on infrastructure projects has lagged expectations, said analyst Gerardo Copca of Metanalisis in Mexico City.
- Corn fell for a second day on speculation demand for the grain will fall from livestock producers because of increased production of feed grains in Russia. Russia, the world's fifth-largest wheat exporter, said today its output of grains and legumes will rise to 95 million tons, up from a prior projection of 85 million tons, according to a report from RIA Novosti, citing Agriculture Minister Alexei Gordeyev.
- Crude oil was little changed after rising yesterday as Tropical Storm Gustav formed in the Caribbean Sea, raising concern it may threaten oil fields in the Gulf of Mexico.

Wall Street Journal:
- The last two Democratic presidents, Jimmy Carter and Bill Clinton, were hamstrung by rising deficits, feuds with Congress and antigovernment sentiment in Washington. Sen. Obama's advisers argue that he would be largely free from those constraints, easing the way for him to put in place big government programs, tax increases on the wealthy and trade restraints. An Obama victory would be nearly certain to usher in a larger Democratic majority, which could give his proposals smoother sailing through Congress.
- With Speech, Michelle Obama Seeks Reintroduction.

MarketWatch.com:
- Coach(COH) to buy back up to $1 billion in shares. The shares rose 4.1% in after-hours trading.
- Is the oil price spike over? And if the recent increase in oil prices hurt the economy, how much did the two-decade decline in oil prices help it? Adjusted for inflation, the price of oil shows long periods of decline as well as short periods of surge. This pattern goes back to the Civil War, when oil in real terms spiked to $109.64a barrel in 1864. Besides the Civil War peak, oil prices also spiked in 1980, to $92.49.
- Growth slowdown is Europe’s main problem. Why ECB will face pressure to rescind the last rate hike.

NY Times:
- American natural gas production is rising at a clip not seen in 50 years, pushing down prices of the fuel and reversing conventional wisdom that domestic gas fields were in irreversible decline. Domestic gas production was up 8.8 percent in the first five months of this year compared with the period a year earlier, a rate of increase last seen in 1959, during the great drilling boom that followed World War II. A Deutsche Bank report, by the analyst Shannon Nome, recently estimated that production from the eight largest shale fields was likely to hit 6.6 billion cubic feet a day this year, or 11.8 percent of national gas production, and then rise to 14.5 billion cubic feet a day by 2011 — almost a quarter of domestic production. The new drilling boom uses advanced technology to release gas trapped in huge shale beds found throughout North America — gas long believed to be out of reach. Rising production of natural gas has significant long-range implications for American consumers and businesses. A sustained increase in gas supplies over the next decade could slow the rise of utility bills, obviate the need to import gas and make energy-intensive industries more competitive. “You can have a transition with natural gas that is cheap, abundant and clean,” the House speaker, Nancy Pelosi of California, said Sunday on “Meet the Press” on NBC. She also said that an investment she and her husband had made in a company that produces natural gas for use in automobiles, revealed last week by The Wall Street Journal, was not a conflict of interest because “I’m investing in something I believe in.”
- Saudi Arabia and other Persian Gulf countries are keeping their currencies pegged to the US dollar even as it falls in value, signaling they’re willing to accept higher inflation.

Theday.com:
- Procter & Gamble Co.(PG) plans to try its hand at the dry cleaning business under the Tide detergent brand. Gary Coombe, vice president for new business development, said in an interview Monday that three Kansas City-area Tide Dry Cleaners are set to open in September.

USA Today.com:
- Automakers tweak existing models to boost mileage.

Domestic Fuel:
- Doubts about commercial opportunities for cellulosic ethanol are evaporating: “It is no longer a question of if we are able to produce cellulosic ethanol, but when,” POET CEO Jeff Broin said. Construction on what POET is calling “Project Liberty” will begin in 2009 and the company expects the facility to be online by 2011. “The stars are beginning to align for cellulosic ethanol,” Jeff said.

BusinessWeek.com:
- Demand for PCs is holding up even as the US economy slumps, says S&P analyst Tom Smith.

Reuters:
- U.S. mortgage finance company Freddie Mac(FRE) easily sold $2 billion of short-term debt on Monday, helping to reassure investors that both Freddie Mac and Fannie Mae(FNM) can fund operations without a government bailout. Freddie Mac stock gained 17 percent and Fannie Mae shares rose 3.8 percent, while the benchmark U.S. S&P500 stock index ended down nearly 2.0 percent.

Financial Times:
- Japan could introduce new dividend and capital gains tax breaks in an effort to shift savings into the stock market, under a plan being finalized by the financial services minister. The proposal - modeled on Britain's individual savings account, or Isa, introduced by Gordon Brown shortly after he became chancellor in 1997 - is part of wide-ranging reforms aimed at boosting the competitiveness of Japan's markets.

Late Buy/Sell Recommendations
Citigroup:
- Rated Buy on (LBTYA), target $44.
- Upgraded (CRM) to Buy, target $70.
- Reiterated Buy on (PSYS), target $41.

William Blair:
- Rated (MA) and (V) Outperform.

Night Trading
Asian Indices are -1.25% to -.75% on average.
S&P 500 futures +.18%.
NASDAQ 100 futures +.18%.

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Earnings of Note
Company/EPS Estimate
- (BIG)/.27
- (DAKT)/.17
- (COCO)/.09
- (SFD)/-.02
- (TUES)/-.07
- (CHS)/.03
- (AEO)/.28
- (SAFM)/.22
- (DY)/.21
- (BGP)/-.29
- (JCG)/.32

Economic Releases
10:00 am EST
- Consumer Confidence for August is estimated to rise to 53.0 versus 51.9 in July.
- New Home Sales for July are estimated to fall to 525K versus 530K in June.
- The 2Q House Price Purchase Index is estimated to decline 1.5% versus a 1.7% fall in 1Q.

2:00 pm EST
- Minutes of Aug. 5 FOMC Meeting

Upcoming Splits
- (SYNA) 3-for-2

Other Potential Market Movers
- The weekly retail sales reports, S&P/CaseShiller Home Price Index, Richmond Fed Manufacturing Index, (ANSS) analyst meeting, (PERY) investor conference and Morgan Stanley Semiconductor Conference could also impact trading today.

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

Stocks Finish Near Session Lows, Weighed Down by Financial, Steel, Gaming, REIT and HMO Shares

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In Play

Stocks Lower into Final Hour on Global Growth Worries, Financial Sector Angst

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Alternative Energy longs, Retail longs, Computer longs and Medical longs. I added (QQQQ)/(IWM) hedges and added to my (EEM) short today, thus leaving the Portfolio 75% net long. The tone of the market is negative as the advance/decline line is substantially lower, every sector is declining and volume is very light. Investor anxiety is above average. Today’s overall market action is bearish. The VIX is rising 10.7% and is still above-average at 20.82. The ISE Sentiment Index is below average at 127.0 and the total put/call is above average at 1.08. Finally, the NYSE Arms has been running very high most of the day, hitting 1.95 at its peak, and is currently 1.68. The Euro Financial Sector Credit Default Swap Index is falling .17% today to 86.83 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 unch. at 141.65 basis points. The TED spread is rising 1.8% to 1.14 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 3 basis points to 2.15%, which is down 48 basis points in about six weeks. The Russian RTS Index fell another 3.2% today, making a new 52-week low, and is now down 34.0% in less than three months. I still see further meaningful downside is those shares. Despite another spike in US financial sector worries and the recent bounce in oil, the US dollar continues to trade well and further upside in the currency is likely over the coming weeks after a period of consolidation. I am seeing a number of signs that much of today’s stock selling is forced, likely as a result of last week’s whipsaw action in commodities. Once again, volume remains very light on today’s sell-off, with a very high ARMs reading. This indicates that it won’t take much to lift stocks once the selling subsides. There were several companies that saw meaningful corporate insider buys last week. Here are a few: CINF, WPC, BBT, STI, MI, NGLS, AFG, GAP, CPN and ABMD. Piper Jaffray is saying today that NPD data suggest that Apple sold 11 million iPod units versus street estimates of 10.8 million. As well, they believe Apple sold 2.9 million Macs versus street estimates of 2.65 million. I still think Apple is consolidating before another large move higher into year-end. Nikkei futures indicate a -208 open in Japan and DAX futures indicate a -19 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:
- Gold fell $7.5/ounce on speculation that last week's rally was overdone. The metal has dropped 20 percent from a record $1,033.90 an ounce in March, partly because the US dollar has rebounded against the euro. Investment in the SPDR Gold Trust, the biggest exchange- traded fund backed by bullion, fell 1.2 percent last week to 651.4 tons. The fund reached a record 705.9 tons on July 11. The historical volatility of gold, or the rate at which a price moves up and down, was 26 percent in the past month, compared with 16 percent over the same period a year earlier.
- Wheat fell 1.9% on speculation rain in the southern U.S. Great Plains will help build soil moisture for plants that will be seeded starting next month. Wheat has plunged 35 percent from a record $13.495 a bushel on Feb. 27 on forecasts for increased global production. World inventories are expected to jump 18 percent to 136.2 million tons by May 31.
- Asian currencies declined, led by South Korea's won, on speculation overseas investors will cut holdings of local shares, adding to demand for dollars. The won fell the most in almost three months to reach its lowest since November 2004 after Finance Minister Kang Man Soo said Aug. 22 that South Korea's inflation rate is likely to remain high even after oil's decline.
- Thailand's economic growth slowed more than expected in the second quarter, increasing the likelihood the central bank will soon stop raising interest rates. Growth may ease further in the second half as protests and court cases against Prime Minister Samak Sundaravej's six-month-old government erode consumer confidence.
- Petroleo Brasileiro SA(PBR), Brazil's state-controlled oil company, fell the most in a week in Sao Paulo trading after Itau Corretora said the government is likely to raise taxes on existing oil concessions in the so-called pre- salt fields once production begins.

NY Times:
- Mr. Obama has received overwhelming support from black voters, many of whom believe he will help bridge the nation’s racial divide. But even as they cheer him on, some black scholars, bloggers and others who closely follow the race worry that Mr. Obama’s historic achievements might make it harder to rally support for policies intended to combat racial discrimination, racial inequities and urban poverty. As part of his urban policy plan, Mr. Obama promises to increase the minimum wage, expand affordable housing, provide full financing for community block grants and create a White House office of urban affairs.

CNBC.com:
- Kohlberg Kravis Roberts, the private-equity firm run by Henry Kravis, has "expressed a high level of interest" in buying Lehman Brothers’(LEH) crown jewel, the Neuberger & Berman money management firm, people close to the negotiations said.
- Intel(INTC) Sees Strong 2008 – And No Slowdown.
- Chip makers are convinced of the potential for motion sensing chips in portable gadgets, thanks to the success of Nintendo's Wii game consoles and Apple's iPhones. The market for micro-electro-mechanical systems (MEMS) devices, which detect motion using acceleration sensors, could reach $7.3 billion this year and $11 billion by 2011, Taiwan chip maker Taiwan Semiconductor Manufacturing (TSMC) has said, quoting independent research.

LA Times:
- Gold-market bulls couldn’t buy publicity much better than this: The U.S. Mint says it has run out of one-ounce American Eagle gold coins amid rocketing demand. The Mint told coin dealers a week ago that its inventories of one-ounce Eagles had been temporarily depleted because of "unprecedented demand." Small investors apparently saw the price drop as a great chance to buy -- which is the opposite of what normally happens, said Ken Edwards, a partner at California Numismatic Investments in Inglewood.

Politico:
- Tensions boil between Obama-Clinton camp. As Democrats arrived here Sunday for a convention intended to promote party unity, mistrust and resentments continued to boil among top associates of presumptive nominee Barack Obama and his defeated rival, Hillary Rodham Clinton. Some senior Obama supporters are irritated at how they perceive the Clintons fanned — or at a minimum failed to douse — stories that she was not even vetted as a possible vice presidential nominee.

Seattlepi.com:
- Amazon(AMZN) is working on a new version of the Kindle, and sees a big opportunity to market its e-book reader to college students, McAdams Wright Ragen analyst Tim Bueneman said Friday in an e-mailed note based on meetings with management.

AppleInsider:
- Digg creator Kevin Rose says he knows many details of Apple's iPod revisions for September, including what appears to be a photo of the fourth-generation iPod nano and a teaser for information of iTunes 8.0.

Reuters:
- Apple (AAPL) expects to sell 3.5 million iPhones in Russia in the next two years, according to market sources familiar with new deals being struck by Russian carriers. Up to 600,000 iPhones have already flooded into Russia through unauthorized sales but now at least two carriers have signed an official framework agreement with the manufacturer and one more deal is expected next week, according to analysts and market sources.
- The International Monetary Fund has trimmed its forecasts for 2008 and 2009 world economic growth, largely due to a marked worsening in the outlook for the euro zone, a G20 finance official told Reuters on Monday.

El Pais:
- More than half of Spain’s real estate agents have closed since the start of the year as a property slump hits demand for homes. Of 3,001 agent branches representing the top 10 real estate sales franchises open at the end of last year, only 1,434 are still in business, citing Tormo & Assoc., a consulting firm.

El Mundo:
- Fuel sales at the pumps of Spanish service stations fell in July by 15%, the fastest pace since 1993 as consumers reined in spending and limited holiday trips.

Gestion:
- Rio Tinto Group’s(RTP) Peruvian copper mine may start producing in 2014. Rio Tinto’s La Granja mine, which will cost $3 billion to develop, will start producing 300,000 tons of copper a year, citing the CEO of the company’s copper division. The company is studying an expansion of the mine’s capacity to 500,000 tons a year.

The Economic Times:
- DUBAI: OPEC is likely to keep oil output policy unchanged at its meeting in September as prices remain high despite a sharp fall from July's peak, an OPEC source said on Monday. OPEC members wanted to see prices that prevent long-term demand erosion and encourage global economic growth, the source said, declining to define an ideal price. Venezuela and Iran are among the OPEC members in need of the highest prices and have been the first to publicly call for the group to trim output if the market keeps falling. U.S. demand fell 800,000 barrels per day (bpd) on the year in the first half of 2008, the steepest fall in 26 years.

Times of Zambia:
- Zambia may increase wheat production by 25% this year, citing Millers Assoc. of Zambia Vice Chairman Peter Cottan. The Southern African nation now expects to produce 200,000 tons of wheat in the year through October, up from 160,000 tons last year. The increased production is due to good weather conditions and a reliable supply of electricity for irrigation.

Bear Radar

Style Underperformer:

Small-cap Value -2.24%

Sector Underperformers:

Coal irlind (-4.81%), Steel (-3.92%) and HMOs (-3.52%)

Stocks Falling on Unusual Volume:

HWAY, APWR, R and HGR

Stocks With Unusual Put Option Activity:

1) ATVI 2) GE 3) CHL 4) LTD 5) BCSI