Thursday Watch

Late-Night Headlines
Bloomberg:
- The cost to protect subordinated debt of Fannie Mae(FNM) and Freddie Mac(FRE) fell to the lowest in three weeks after debt sales boosted optimism that the two largest U.S. mortgage-finance companies will avoid a government bailout. Credit-default swaps tied to the subordinated debt of Washington-based Fannie Mae and Freddie Mac of McLean, Virginia, dropped 21 basis point to 220 basis points, according to CMA Datavision.
- Fannie Mae(FNM) Chief Executive Officer Daniel Mudd replaced three top managers at the beleaguered mortgage-finance provider as the company struggles to convince investors it has enough capital to weather the housing slump.
- MBIA Inc.(MBI) will reinsure $184 billion in municipal bonds that are currently insured by Financial Guaranty Insurance Co., according to the New York State Insurance Department. MBIA, the largest bond insurer, jumped as much as 12 percent in after-hours trading after the company said it will receive unearned upfront premiums of about $741 million as part of the contract.
- Spain's economy, brought to the brink of a recession by surging global credit costs, may find money even harder to come by when the European Central Bank tightens its lending practices.
- The staying power of ``The Dark Knight'' and higher ticket prices may propel Hollywood studios to a record $4.2 billion in summer movie ticket revenue.
- BB&T Corp.'s(BBT) John Allison, the chief executive officer who bought 60 rivals since 1989, said his bank may buy more community lenders after the housing market stabilizes next year and called Countrywide Financial Corp.'s exit from the business ``good for the world.'' BB&T, North Carolina's third-largest bank, expects to find attractive targets as falling profits pressure poorly run companies to sell, Allison said in an interview today.
- Lehman Brothers Holdings Inc.(LEH) is weighing bids from buyout firms KKR & Co. and Bain Capital LLC for the investment bank's asset management unit, three people briefed on the negotiations said.
- Jo-Ann Stores Inc. (JAS) increased 10 percent to $24.97 in after-hours trading. The largest U.S. fabric retailer reported a second-quarter loss that was less than analysts estimated and raised its annual forecast.
- Men's Wearhouse Inc. (MW) increased 5.4 percent in extended trading to $21.08. The apparel retailer with more than 1,200 stores reported adjusted profit of 72 cents a share, beating the average analyst estimate by 2.1 percent.
- Crude oil was little changed in New York after rising on speculation Tropical Storm Gustav will be the most damaging since Hurricane Katrina as it moves toward production platforms in the Gulf of Mexico.
- Pakistan set a floor for stock prices on the benchmark exchange, moving to halt a plunge that has wiped out $36.9 billion of market value since April. Securities can trade within their daily limit of 5 percent ``but not below the floor-price level'' of yesterday's close, the exchange said on its Web site.
- The Philippine economy expanded at the slowest pace in three years as faster inflation hurt consumer spending, keeping pressure on the central bank to raise interest rates.

Wall Street Journal:
- Democrats Nominate Obama, As Clinton Delegates Fall In.

MarketWatch.com:
- Democratic leaders are licking their lips in anticipation of a working majority in the Senate next session. But they are struggling to avoid overconfidence. “There’s not a worry in world,” Senate Majority Leader Harry Reid gloated, whereupon Sen. Charles Schumer, D-N.Y., waved his arm in front of Reid and knocked loudly on the lecturn.
- Despite the perfect financial storm over the past year involving plunging housing prices and the subprime mortgage mess, the banking industry as a whole still turned a tidy profit.
- The digital home. The future of the digital home is more than just a bunch of big-screen TVs and computers. It’s design and construction that’s smart, sustainable and offers the essentials that work well for your lifestyle. More in this special report: New building technology, and a home that’s smart and is art.

CNBC.com:
- Presumptive Democratic nominee Barack Obama wants to raise taxes on Americans making over $250,000 per year. That may seem like a lot of money, but it depends a lot on where you live.
- Investors should abandon defensive positions and broaden their portfolios to get a jump on the next U.S. bull market, Charlie Morris, head of Absolute Return HSBC Investments, told CNBC Wednesday. (video)

NY Times:
- Before they ship PCs to retailers like Best Buy(BBY), computer makers load them up with lots of free software. For $30, Best Buy will get rid of it for you. That simple cleanup service is threatening the precarious economics of the personal computer industry.

Forbes.com:
- 7 Technologies That Could Change Health Care.

VentureBeat:
- Europe’s largest onshore wind farm is coming to Romania.

USA Today.com:
- New data shows New York City residents are contracting the virus that causes AIDS at three times the national rate.

San Francisco Chronicle:
- Billionaire financier and liberal activist George Soros is behind the efforts to decriminalize pot.

BusinessWeek.com:
- Amazon.com(AMZN) Beefs Up Kindle Franchise. Purchases of startups including Web site Shelfari could harness the e-reader’s success and bolster the online retailer’s share price.

Reuters:
- New York Attorney General Andrew Cuomo's office is probing the relationship between Fidelity Investments and Goldman Sachs Group Inc (GS) in connection with the broker's sales of auction-rate securities, people familiar with the investigation said on Wednesday.
- U.S. taxable money market fund assets rose $7.66 billion to a record $2.997 trillion in the week ended Tuesday, the Money Fund Report said on Wednesday.

TimesOnline:
- Britain's economy is set to shrink over the next year as a deepening recession inflicts the first full-year fall in national income since 1991, a leading forecasting group predicts today. In a dire assessment that will fuel fears over the growing severity of the downturn gripping the nation, Capital Economics becomes the first significant forecaster to project that the slump will lead to a full-year drop in GDP over 2009.

Xinhua:
- The Chinese government will stick to an economic policy that focuses on curbing inflation for the rest of the year, a senior official on Wednesday told China's top legislature, as slowing output and rising prices loom over the post-Games economy.

Late Buy/Sell Recommendations
- None of note

Night Trading
Asian Indices are -.50% to +.75% on average.
S&P 500 futures -.17%.
NASDAQ 100 futures -.16%.

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Earnings of Note
Company/EPS Estimate
- (ENER)/.22
- (SHLD)/.36
- (ZLC)/-.56
- (WSM)/.07
- (BF/B)/.89
- (NOVL)/.05
- (MCRS)/.39
- (PETM)/.28
- (SIGM)/.40
- (OVTI)/.30
- (WIND)/.08
- (TIF)/.55
- (DELL)/.36
- (FRED)/.10
- (DLM)/-.05
- (GCO)/.04

Economic Releases
8:30 am EST
- Preliminary 2Q GDP is estimated to rise 2.7% versus a prior estimate of a 1.9% gain.
- Preliminary 2Q Personal Consumption is estimated to rise 1.6% versus a 1.5% prior estimate.
- Preliminary 2Q GDP Price Index is estimated to rise 1.1% versus a prior estimate of a 1.1% gain.
- Preliminary 2Q Core PCE is estimated to rise 2.1% versus a 2.1% prior estimate.
- Initial Jobless Claims for last week are estimated to fall to 425K versus 432K the prior week.
- Continuing Claims are estimated to rise to 3390K versus 3362K prior.

Upcoming Splits
- (SYNA) 3-for-2

Other Potential Market Movers
- The weekly EIA natural gas inventory report and (UHAL) investor meeting could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by mining and financial 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 Higher, Boosted by Gaming, Construction, Homebuilding, Steel and I-Banking Shares

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In Play

Stocks Higher into Final Hour on Short-Covering, Bargain-Hunting

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Alternative Energy longs, Software longs, Retail longs and Computer longs. I covered all my (IWM/QQQQ) hedges and some of my (EEM) short this morning, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, almost every sector is rising and volume is very light. Investor anxiety is about average. Today’s overall market action is bullish. The VIX is falling .3.9% and is still above-average at 19.71. The ISE Sentiment Index is below average at 126.0 and the total put/call is about average at .86. Finally, the NYSE Arms has been running about average most of the day and is currently .90. The Euro Financial Sector Credit Default Swap Index is rising 2.6% today to 93.83 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 +.69% to 145.36 basis points. The TED spread is rising 2.83% to 1.14 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 2 basis points to 2.19%, which is still down about 44 basis points in about six weeks. The Citi eurozone economic surprise index is now -170.80 versus a reading of +51.90 for the US economic surprise index. The US dollar index is down .21% today on hawkish ECB comments and profit-taking. I will be very surprised if the ECB doesn’t lower rates over the coming months, despite this rhetoric. Heavily-shorted (FNM), (FRE) and (LEH) are surging again today, which is helping push the (XLF) 1.0% higher. Nikkei futures indicate an +100 open in Japan and DAX futures indicate an +27 open in Germany tomorrow. I expect US stocks to trade mixed into the close from current levels as short-covering offsets higher energy prices and rising credit market angst.

Today's Headlines

Bloomberg:
- Fannie Mae(FNM) and Freddie Mac(FRE) sold $3 billion of short-term notes at yields that suggest the U.S. mortgage-finance companies are still capable of financing their businesses without government assistance.
- Goldman Sachs Group Inc.(GS) had its third-quarter earnings estimate cut almost in half by Morgan Stanley analyst Patrick Pinschmidt, who said stock market declines will force the bank to revalue investments. Pinschmidt said Goldman's third-quarter earnings will probably be $1.65 a share, down from his earlier prediction of $3. Principal investments at Goldman include private equity and real estate holdings, as well as stock in the Industrial and Commercial Bank of China Ltd., the nation's biggest lender. ICBC's shares have declined 18 percent since the end of May in Shanghai trading.
- The Baltic Dry Index, a measure of shipping costs for commodities, fell for a sixth straight trading day on weaker demand for so-called panamax ships to haul grains. The index is 40% below its record on May 20^th.
- OAO Gazprom led a jump in the cost of protecting Russian companies from default to the highest in almost five months on investor concern the country's military incursion in Georgia will trigger a rise in borrowing costs. Credit-default swaps on the world's largest natural-gas producer increased 36 basis points to 260 this month, and Moscow-based oil-pipeline operator OAO Transneft rose 33.5 to 265, according to at CMA Datavision prices at 3:15 p.m. in London. Contracts on Russia's government debt climbed 32 to 134, the highest since April 2.
- US mortgage-servicing companies helped a record 192,034 homeowners avert foreclosure last month by setting up repayment plans or changing terms to make loans more affordable, an industry survey showed. The Hope Now Alliance, a coalition of servicers, counselors and investors, helped almost 2.07 million homeowners stay in their homes since July 2007.
- The crisis of confidence that sent Fannie Mae(FNM) and Freddie Mac(FRE) debt costs to record highs above U.S. Treasuries is also providing the mortgage-finance companies with the biggest profits on new investments since at least 1998.
- Oil, natural gas and gasoline rose on speculation Tropical Storm Gustav will become the most damaging hurricane since Katrina, as it moves toward production platforms in the Gulf of Mexico.
- Borders Group Inc.(BGP), the bookseller that put itself up for sale in March, jumped as much as 27 percent in New York trading after reporting a second-quarter loss that was narrower than analysts estimated.
- European Central Bank council member Axel Weber said there's no room for interest-rate cuts and policy makers may need to raise borrowing costs once the economy emerges from its slump.

Wall Street Journal:
- Joe Biden has fought to preserve Delaware federal courts' disproportionate share of corporate bankruptcies, benefiting law firms in his home state that rank among his top supporters.
- Hedge Funds Help Fill Gap In Lending for Property.
- Infrastructure funds are in trouble. Will the infrastructure builders be next? Quickening inflation and tightening credit are squeezing infrastructure projects in China, India and Middle Eastern countries that mean business for contractors and heavy-equipment makers. About 8%, or $60 billion, of the $750 billion of such projects scheduled for this year have already been delayed or canceled, according to Morgan Stanley, which reckons global infrastructure spending will growth 3% in 2008, down from 10% last year, and might even decline in 2009. That will hurt companies such as General Electric(GE), which makes power generation equipment, Caterpillar(CAT), which produces earth-moving machinery, and Emerson Electric(EMR), a manufacturer of heating and cooling systems.

The Washington Post:
- Sen. Barack Obama sought more than $3.4 million in congressional earmarks for clients of the lobbyist son of his Democratic running mate, Sen. Joseph R. Biden Jr. of Delaware, records show. Obama's campaign has taken a hard stance against the world of lobbying in the nation's capital.

AP:
- The head of a powerful service workers union threatened Tuesday to unleash money from a $10 million "accountability" fund to defeat any political figure — Democrats included — who breaks promises to organized labor. "Any Democrat — or Republican — who said they were going to support us on health care or free choice and turns against us is going to paint a target" on their backs, Andy Stern, president of the powerful Service Employees International Union, told The Associated Press in an interview. "...We're not going to just win this election and hope Barack Obama does well. People want something to happen."

Financial Times:
- The US consumer is not the only one feeling down and out. Since the start of the year, higher food and energy prices have undermined consumer confidence not only in Detroit but also in Dusseldorf, Delhi and Dalian. The upshot: a global slump in personal spending is unfolding, portending rockier times for the global economy and world financial markets.

Handelsblatt:
- K+S AG, Europe’s largest producer of potash used in fertilizers, plans to expand its potash production in the coming years. In light of the expansion of the potash market, that will mean a production increase of as many as three million tons and investments of more than $2.94 billion in the next 5-10 years.

Bear Radar

Style Underperformer:

Large-cap Growth +.76%

Sector Underperformers:

Airlines irlind (-2.53%), Medical Equipment (+.11%) and Restaurants (+.16%)

Stocks Falling on Unusual Volume:

AMLN, ALKS, SOLF, UAUA, JCG, DY and PPC

Stocks With Unusual Put Option Activity:

1) MTH 2) AMLN 3) FRX 4) DISH 5) MAS

Durable Goods Orders Jump Again

- Durable Goods Orders for July rose 1.3% versus estimates of unch. and an upwardly revised 1.3% gain in June.

- Durables Ex Transports for July rose .7% versus estimates of a .7% decline and an upwardly revised 2.4% gain in June.

BOTTOM LINE: Orders for US durable goods unexpectedly increased in July and June orders were revised higher, Bloomberg reported. Bookings for non-defense capital goods excluding aircraft, a gauge of future business investment, rose 2.6%, the most since April. Shipments of those items, which are used to compute GDP, rose .6% versus a .4% gain the prior month. Gains in orders for machinery, metals, communications gear, automobiles and aircraft all contributed to the increase in demand in July. I expect Durable Goods to continue to remain firm through year-end on inventory rebuilding and better-than-expected demand. Tomorrow's preliminary 2Q GDP report should show a meaningful revision higher from an original 1.9% estimate.