Graph: US Oil Demand and Prices Plunged After Hurricanes Katrina and Rita

(click on image to enlarge)

BOTTOM LINE: It seems to be conventional wisdom by the many oil cheerleaders in the financial press that damaging hurricanes are bullish for oil prices. While the historic hurricanes in 2005 did cause an initial spike in prices as they made landfall, the ensuing plunge in US oil demand eventually led to a severe decline in energy prices. Hurricane Katrina made landfall on Aug. 29th and Rita on Sept. 24, 2005. As you can see from the above graph, the four-week moving average of US oil demand(the green line) plunged 19.4% from the week of Sept. 2nd through the week of October 21st. The price of a barrel of oil peaked on August 30, 2005 at $70.85 and collapsed 21.8% to $55.40 a barrel on November 18th, 2005. Moreover, the International Energy Agency has said it is ready to release strategic oil stocks if needed and European refineries are under-utilized, meaning that imports could easily rise to cover any lost petroleum product supply. Finally, I would argue that the global fundamentals for oil are much worse now than during 2005 even with prices substantially higher.

2Q GDP Revised Substantially Higher to 3.3% Despite Significant Inventory Drawdown, Intial Jobless Claims Fall

- Preliminary 2Q GDP rose 3.3% versus estimates of a 2.7% gain and a prior estimate of a 1.9% increase.

- Preliminary 2Q Personal Consumption rose 1.7% versus estimates of a 1.6% gain and a prior estimate of a 1.5% increase.

- Preliminary 2Q GDP Price Index rose 1.2% versus estimates of a 1.1% gain and a prior estimate of a 1.1% increase.

- Preliminary 2Q Core PCE rose 2.1% versus estimates of a 2.1% gain and a prior estimate of a 2.1% increase.

- Initial Jobless Claims for last week fell to 425K versus estimates of 425K and 435K the prior week.

- Continuing Claims rose to 3423K versus estimates of 3390K and 3359K prior.

BOTTOM LINE: The US economy expanded faster than previously estimated in the second quarter, helped by a surge in exports, Bloomberg reported. Trade contributed the most to US growth in almost 30 years as the trade deficit shrank to the lowest level in 8 years. The expansion during 2Q was the fastest since 3Q 2007. Residential construction continued to substantially impact growth, falling a larger than initially reported 15.7% during 2Q. As well, inventories fell at a $49.4 billion annual rate during 2Q, which subtracted 1.44 percentage points from growth. I still believe 3Q/4Q GDP will exceed estimates on decelerating inflation, inventory rebuilding, better-than-expected domestic demand and strong, but slowing, exports.

The number of Americans filing new jobless claims declined last week, Bloomberg reported. The four-week moving average of jobless claims dropped to 440,250 from 446,250 the prior week. The jump in jobless claims in prior weeks due to the government’s extension of jobless benefits that was passed under the spending bill signed by President Bush still hasn’t been quantified by the government. The unemployment rate among those eligible for benefits, which tracks the US unemployment rate, rose to 2.6% versus 2.5% the prior week and the long-term average of 2.9%. I expect jobless claims to continue to improve modestly through year-end.

Bull Radar

Style Outperformer:

Small-cap Value (+1.20%)

Sector Outperformers:

Airlines (+5.70%), Gaming (+2.40%) and Telecom (+2.10%)

Stocks Rising on Unusual Volume:

TXT, AXA, ALJ, MGG, LAYN, CLNE, AMLN, KNDL, BIOD, DXPE, UAUA, AFAM, SPWR, SYMC, LBTYK, ZLC, JAS, TIF, MBI, IGV, MW, CYD and PER

Stocks With Unusual Call Option Activity:

1) AFL 2) ESI 3) COH 4) ARO 5) NKE

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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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