Friday Watch

Late-Night Headlines
Bloomberg:
- The biggest rally in MBIA Inc.(MBI) in seven months put the squeeze on speculators who had placed record bets against the shares of the largest bond insurers. MBIA jumped 35 percent in New York trading after it agreed yesterday to reinsure $184 billion in municipal bonds for Financial Guaranty Insurance Co. in a deal brokered by New York State Insurance Superintendent Eric Dinallo, signaling it may be able to salvage its business of insuring bonds. Investors such as William Ackman have sold short as many as 86.1 million shares of MBIA, or 31 percent of the outstanding stock, anticipating the company wouldn't weather record losses on securities it guaranteed. A year ago, the short interest in MBIA was 29.3 million shares. MBIA's role for FGIC bondholders casts the Armonk, New York-based company as a rescuer rather than a victim, demonstrating it can win new business after losing its AAA rating. ``The New York State Insurance Department is saying that this company is a long-term survivor, adequately capitalized and part of the solution,'' said Charles Lemonides, chief investment officer of New York-based ValueWorks, which owns shares of MBIA and Ambac. Ackman and others bet losses may be so great that the insurers' holding companies may file for bankruptcy. His Pershing Square Capital Management LP continues to maintain a short position on MBIA, he said today in a telephone interview, declining to specify its size. Ambac may be able to get similar deals, said Jim Ryan, an insurance analyst with Morningstar Inc. in Chicago. ``If you judge them by their last quarterly report, both companies have tremendous amounts of excess capital,'' he said.
- Iraq's bonds are delivering the biggest returns in emerging markets as oil export revenue bolsters government finances and violence declines. The country's $2.7 billion of 5.8 percent bonds due 2028 gained 45 percent since August 2007, according to Merrill Lynch & Co. indexes. Investors demand 4.84 percentage points more in yield to own the debt instead of Treasuries, down from 7.26 percentage points a year ago. A reduction in bloodshed has allowed the Bush administration to consider a ``general timeline horizon'' for troop reductions. Oil exports will climb as high as $86 billion this year, more than double the $30 billion annual average from 2005 to 2007. Iraq, which has the world's third-largest oil reserves, sold the debentures in January 2006 as part of a settlement with creditors who agreed to forgo claims on debt issued under the regime of Saddam Hussein. ``The political situation has improved substantially,'' said Jonathan Binder, who began buying Iraqi bonds for the more than $2 billion of emerging-market assets he manages at INTL Consilium LLC in Fort Lauderdale, Florida.
- Petroleo Brasileiro SA(PBR), Brazil’s state-controlled oil company, and Potash Corp. of Saskatchewan Inc.(POT), the world’s largest producer of the crop nutrient, were added to Goldman Sachs Group Inc.’s(GS) list of the 50 most popular stocks held by hedge fund managers.
- Corn and soybeans fell the most this week on speculation that rain improved growing conditions for crops that farmers will begin harvesting next month in the U.S., the world's largest grower and exporter. The last U.S. corn harvest, completed in November, was 24 percent larger than the prior year at 332.1 million metric tons (13.1 billion bushels), according to the Department of Agriculture. U.S. stockpiles as of Aug. 31, before this year's harvest, are expected to rise 21 percent from 12 months earlier, government data show.
- Hogs fell to the lowest price since early April on signs that U.S. meatpackers are increasing pork supplies and overwhelming demand from grocers.
- Toyota Motor Corp., working to keep a lead in advanced autos over General Motors Corp., is developing an electric-powered small car and will speed up testing of plug-in Prius hybrids with new battery technology. The all-electric car will be ``mass-produced'' in the early 2010s, President Katsuaki Watanabe said today in Tokyo without elaborating. Tests of rechargeable Priuses, previously set for 2010, were moved up to late 2009, the automaker said. The shift by the world's largest seller of hybrid autos reflects rising demand for fuel-efficient cars amid record oil prices. Toyota's new timetable for the plug-in Prius mirrors GM's planned schedule for tests of its rechargeable Volt.
- FirstFed Financial Corp.(FED), the parent of First Federal Bank of California, surged to the highest in 12 weeks in New York trading after an analyst said short interest in the company exceeded the number of publicly traded shares. Short interest climbed to 12.6 million shares, or 108 percent of the 11.7 million shares available for trading, according to Bloomberg data. ``We question whether or not this level of shares has actually been borrowed and sold short under stock exchange rules,'' Keefe, Bruyette & Woods analyst Frederick Cannon said in a note to investors yesterday. The short positions may prompt a review by the stock exchange or by the U.S. Securities and Exchange Commission, Cannon said.
- ‘Committee to Save the Dollar’ May Not Be Needed.
- Republican presidential candidate John McCain is preparing to name his running mate, who will appear with McCain tomorrow at a rally in Dayton, Ohio. The Arizona senator and his choice for a vice presidential candidate will make their joint appearance at an event scheduled for 11 a.m. local time, McCain spokesman Taylor Griffin said.
- Dell Inc.(DELL), the world's second-largest personal-computer maker, posted a profit that trailed analysts' projections and said a slowdown in technology spending is expanding into Europe and Asia. The stock fell 10 percent in late trading after Dell reported earnings, excluding some costs, of 33 cents a share.
- Russia looked East in its standoff with the West. It didn't get much help. A summit of the Shanghai Cooperation Organization, a seven- nation security alliance that includes China and four former Soviet republics, yesterday declined to back its recognition of two breakaway Georgian regions. China expressed ``concern,'' said Qin Gang, a Foreign Ministry spokesman. The U.S. highlighted Russia's isolation. ``I would just say that it wasn't what I would call an endorsement,'' U.S. State Department spokesman Robert Wood said in Washington. ``The fact that you haven't seen countries come forth and recognize these two parts of Georgia's territory is a significant sign.''
- The Australian dollar fell, headed for the biggest monthly loss in 22 years, on speculation the nation's interest-rate advantage over the U.S. will narrow. New Zealand's dollar headed for a third monthly loss. The currencies weakened after a government report showed yesterday the U.S. economy grew faster than economists expected in the second quarter.
- Harm Bandholz, an economist at UniCredit Markets and Investment Banking, sees ‘stabilization’ in US housing. (video)
- South Korea's won headed for its biggest monthly loss since August 1998 as overseas investors sold local stocks and refiners bought dollars to pay import bills. Government bonds rose. The won was the worst performing currency in Asia outside Japan today as the central bank said the current-account balance returned to a deficit in July due to costlier oil prices. Attempts by officials to halt the won's slide failed to keep the currency from reaching its lowest since 2004 this week.

MarketWatch.com:
- Democratic Sen. Barack Obama, saying the nation was at a "defining moment," turned a page in the history books Thursday night and vowed to "keep the American promise alive" if elected president. Obama became the first person of African-American descent to accept a major party's nomination for president, 45 years to the day after Rev. Martin Luther King Jr. declared in his landmark "I Have A Dream" speech that members of his race were "still languishing in the corners of American society."
- Chicken Littles and the US Banks. Today's turmoil "just doesn't strike me as anything coming close to the period of 1982 to 1993, when thousands of S&Ls and banks had to be closed," said Lawrence White, who served on the Federal Home Loan Bank Board from 1986 to 1989. That period witnessed the failure of more than 1,000 banks or savings and loans with close to $200 billion in assets on the books. Let's put the current period in perspective. Nine banks have failed. Three banks failed last year. None failed in 2006 and 2005. Three of the four banks that failed in 2004 were attributed to bank insurance fraud. But you get the point. There are more than 7,200 banks in the U.S. market. Not many are failing.
- Google Inc.(GOOG) on Thursday cited a legal victory by online video-sharing service Veoh Networks Inc. as an indication that it can prevail in its own high-profile litigation with Viacom Inc.

CNBC.com:
- US Economy is Far from Dead. The bottom line is that the U.S. saw growth during one of the worst credit crunches in history says Jack Bouroudjian, Chairman of Capital Markets Technology. He tells CNBC's Martin Soong, Amanda Drury and Sri Jegarajah why his outlook for U.S. markets is bright. (video)

NY Times:
- The city of Austin, Tex., approved plans on Thursday for a huge plant that will burn waste wood to make electricity, the latest sign of rising interest in a long-dormant form of renewable energy.

Rasmussen:
- The Rasmussen Reports daily Presidential Tracking Poll for Thursday shows hints of a modest convention bounce building for Barack Obama. The Democrat gained a point from yesterday and now attracts 45% of the vote nationwide while John McCain earns 44%.

USA Today.com:
- Boeing(BA) could face a revenue drain of $3 billion to $3.5 billion a month and could see its high-profile 787 Dreamliner and two other new aircraft programs delayed if a threatened strike by production workers occurs next week. The company also could be required to pay late delivery penalties to at least some of its customer airlines. Boeing (BA) also could end up covering some costs incurred by subcontractors forced to slow or shut down their operations while Boeing's assembly lines are stopped.
- 30-year mortgages fall to 6.4%, lowest level in 6 weeks.

BusinessWeek.com:
- A Law That Could Give Big Labor Some Brawn. If the Democrats take over in Washington, a bill is likely to pass that would allow workers to unionize if a simple majority sign authorization cards.

Reuters:
- The upcoming holiday season at upscale jeweler Tiffany & Co (TIF) could be the beginning of renewed growth at its established U.S. stores, its chief executive told Reuters on Thursday. Despite moderating sales expectations, Tiffany said it expects a "modest increase" in fourth-quarter same-store sales in the lackluster U.S. market. "That, perhaps, is the beginning of a return to greater consumer confidence that would build throughout 2009," Chief Executive Michael Kowalski said in an interview after the company reported better-than-expected quarterly earnings.
- China crossed the line first in the race for big oil contracts in post-Saddam Iraq and has gained a head start over Western oil majors in the competition for future energy deals. China's biggest oil company, state-run CNPC, agreed a $3 billion service contract with Iraq on Wednesday. The deal could set a precedent for terms that fall far short of the lucrative contracts the oil majors had hoped for as they jostled for access to the world's third largest oil reserves.
- Oil prices fell more than $2 on Thursday after the U.S. government and the International Energy Agency pledged to release emergency stockpiles if Tropical Storm Gustav disrupted U.S. oil production. Forecaster Planalytics said that any damage to offshore platforms would not be long-lasting, after predicting on Wednesday that up to 85 percent of the Gulf's oil and natural gas production could be shut in by Gustav. "The big natgas storage build is lending a bearish tone to the market, even as everyone is still watching Gustav closely," said Phil Flynn, an analyst at Alaron Trading in Chicago.

TimesOnline:
- The UK housing slump appears to be getting rapidly worse as ministers prepare to give councils extra money to intervene in the market. House prices fell at the fastest rate in 18 years this month and a leading estate agent said that multimillion-pound homeowners were feeling the pain of the downturn for the first time.

Financial Post:
- Banks may soon put subprime behind them.

Globe and Mail:
- Consumers to test hydrogen cars.

Korea Economic Daily:
- Woori Finance Holdings Co. is considering buying a regional US bank, citing Chairman Lee Pal Seung.

Business Inquirer:
- Philippine Businesses Turn Pessimistic.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (MRVL), target $22.
- Reiterated Buy on (WFR), target $65.

Morgan Stanley:
- Reiterated Overweight on (DELL), target $28.

ThinkPanmure:
- Rated (ONNN) Buy, target $14.

Night Trading
Asian Indices are +.25% to +1.50% on average.
S&P 500 futures -.23%.
NASDAQ 100 futures -.10%.

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Company/EPS Estimate
- (VLCCF)/.61

Economic Releases
8:30 am EST
- Personal Income for July is estimated to fall .2% versus a .1% gain in June.
- Personal Spending for July is estimated to rise .2% versus a .6% gain in June.
- The PCE Core for July is estimated to rise .3% versus a .3% gain in June.

9:45 am EST
- Chicago Purchasing Manager for August is estimated to fall to 50.0 versus 50.8 in July.

10:00 am EST
- The Final Univ. of Mich. Consumer Confidence reading for August is estimated to rise to 62.0 versus a prior estimate of 61.7.

Upcoming Splits
- (ISYS) 2-for-1
- (ATVID) 2-for-1

Other Potential Market Movers
- The NAPM-Milwaukee could also impact trading today. Financial futures & options close early for Labor Day.

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

Stocks Finish Near Session Highs, Boosted by Airline, Gaming, REIT, Homebuilding, Insurance, Financial, Paper and Telecom Shares

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In Play

Stocks Jumping into Final Hour on Diminishing Credit Market Angst, Less Economic Pessimism, Financial Sector Strength, Falling Oil

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Gaming longs, Retail longs, Medical longs, Software longs and Commodity shorts. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is very positive as the advance/decline line is substantially higher, almost every sector is rising and volume is light. Investor anxiety is about average. Today’s overall market action is bullish. The VIX is falling 1.5% and is still above-average at 19.46. The ISE Sentiment Index is slightly above average at 170.0 and the total put/call is slightly below average at .84. Finally, the NYSE Arms has been running above average most of the day and is currently .97. The Euro Financial Sector Credit Default Swap Index is falling 3.9% today to 90.33 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 -1.2% to 143.1 basis points. The TED spread is declining 5.4% to 1.08 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 2 basis points to 2.17%, which is down 46 basis points in about six weeks. The Citi eurozone economic surprise index is now -164.70 versus a reading of +62.50 for the US economic surprise index. The (XLF) is surging 3.2% today to session highs. MBIA Inc.(MBI) is soaring another 31.2% today, breaking above its 200-day moving-average, on massive volume. MBIA Inc. had been one of the largest short targets of the hedge fund community. Since June 30^th of this year, MBIA is +262.87% higher. The AAII % Bulls fell to 30.7% this week and the % Bears jumped to 45.5%. Numerous analysts and pundits have said on CNBC over the last few days that the only reason the market is rising this week is that sellers aren’t around and that after Labor Day we will see declines in stock prices. Given recent positive developments in the financial sector, very bearish US stock market sentiment, oil’s poor trading action, much better-than-expected economic data and declining political fears, I think it is more likely that stocks will break higher next week on better volume. Nikkei futures indicate an +230 open in Japan and DAX futures indicate an +32 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, falling commodity prices, less economic pessimism, diminishing credit market angst, less financial sector pessimism and bargain-hunting.

Today's Headlines

Bloomberg:
- Fannie Mae(FNM), the largest U.S. mortgage- finance company, ``should get through'' the housing slump without having to raise more capital, according to Lehman Brothers Holdings Inc. Fannie ended the second quarter with $14 billion of core capital above its minimum requirement and $9 billion above its temporary 15 percent surplus requirement, Lehman analyst Bruce Harting in New York wrote today in a note to clients.
- MBIA Inc.(MBI) rose the most in seven months after the company agreed to reinsure $184 billion in municipal bonds for Financial Guaranty Insurance Co., winning new business after losing its top AAA rating.
- The US dollar rebounded from the lowest level against the euro this week as the U.S. economy expanded in the second quarter faster than previously estimated and crude oil prices decreased. The pound dropped to near a record low against the euro and depreciated versus the dollar as house prices in Britain fell this month at the fastest annual pace in almost 20 years. The decline in crude oil pushed Canada's dollar down the most in almost three weeks.
- Copper fell after inventories monitored by the London Metal Exchange jumped to the highest in six months, easing supply concerns. Stockpiles gained 2,200 metric tons, or 1.3 percent, to 170,500 tons today, the highest since Feb. 6. Before today, copper dropped 5.9 percent this month as inventories gained 18 percent.
- Crude oil fell more than $2 a barrel after the International Energy Agency said it would tap strategic stockpiles, if needed, because of Tropical Storm Gustav. Prices also fell because U.S. stockpiles of natural gas, a competing fuel, increased more than analysts forecast. Supplies rose 102 billion cubic feet to 2.757 trillion cubic feet last week, the U.S. Energy Department said today. A gain of 84 billion was expected, according to a Bloomberg News survey. ``This is a really bearish natural gas number,'' said Kyle Cooper, an analyst at IAF Advisors in Houston.
- Wheat fell for the fifth straight session on signs that demand from the U.S., the world's largest exporter of the grain, has waned after the price rallied in the first three weeks of August. ``Our export sales are going to fall off the map because we're too high,'' said Darrell Holaday, the president of Advanced Market Concepts in Manhattan, Kansas. ``Why would you buy from us? The only thing we can do is get the price down to be competitive.''
- Google Inc.(GOOG) will proceed with a partnership to provide advertising on Yahoo! Inc.'s Internet search results by early October, Chief Executive Officer Eric Schmidt said.
- Tiffany & Co.(TIF) rose as much as 12 percent in New York trading after the luxury jewelry maker posted second-quarter profit than nearly doubled and forecast higher annual earnings.
- Eastern Europe's economic outlook is deteriorating and the risk of a ``hard landing'' accompanied by an exchange rate crisis somewhere in the region is ``significant and rising,'' Fitch Ratings said. Average growth in the region may slow to a six-year low of 5.8 percent this year, from 6.9 percent in 2007, and weaken further to 5.3 percent in 2009, Fitch said in a report titled Emerging Europe Faces Testing Outlook today.

Wall Street Journal:
- In a sign of increasing concern about cheating, the nation's top business schools will soon require a high-tech identity check for standardized admissions tests.
- Congress hasn't yet passed any one of the 12 appropriations bills needed to fund the government when the new fiscal year begins Oct. 1. And Congress isn't likely to pass them through both houses and get them to the president before leaving town.
- "There are no winners from this conflict" was the public verdict of Sergei Lavrov, Russia's foreign minister, on his country's war with Georgia. But what about OAO Gazprom, the Kremlin-controlled energy company? The longer-term result of the war will probably be that European governments try to reduce their dependence on Russian energy and that will damage Gazprom stock’s attractiveness as an investment.

The Washington Post:
- Russia's conflict with Georgia is the sign of a "weak" Russian nation, not a newly assertive one, and Moscow now has put its place in the world order at risk, the top U.S. diplomat for relations with the country said in an interview yesterday.

KTIC Radio:
- Internet giant Yahoo(YHOO) is eyeing an Omaha suburb as the location for some of its operations. The company recently applied for the biggest slate of state tax breaks available in Nebraska to help set up some operations in La Vista.

FINalternatives:
- Hedge fund manager Mark Boucher has settled a suit with the Securities and Exchange Commission that accused him of misleading investors in his real estate investments. Boucher, who is also the author of the book “The Hedge Fund Edge,” agreed to pay a $100,000 fine and to refrain from acting as an investment adviser for five years.

Reuters:
- The Inspector General for the U.S. commodity-futures regulator has officially begun an investigation into an inter-agency report on commodity markets, the Wall Street Journal said citing a person close to the matter.
- Two million Britons may be out of work by Christmas and big cuts in interest rates are needed now to stop the economy heading into a deep and prolonged slump, Bank of England policymaker David Blanchflower told Reuters. In an interview on Thursday, Blanchflower said the Bank could no longer be complacent because the economy was already shrinking and a rate cut of more than 25 basis points was probably needed. He said his own forecast earlier this year that house prices could fall by 30 percent was looking optimistic and that the jobless total could spike higher as construction companies and banks lay off workers.

Valor Economico:
- Brazil’s economy is showing signs of slower economic growth and so it’s not the right time to take more steps to curb the country’s credit expansion, Finance Minister Guido Mantega said. The central bank considered measures to reduce the pace of Brazil’s credit growth, which the finance minister called “excessive,” but decided to raise rates instead, Mantega said.

AFP:
- Moqtada al-Sadr, the Iraqi Shiite Muslim religious leader, suspended fighting by his Mahdi Army militia. The militia, which has as many as 60,000 members, will cease operations “indefinitely,” citing a statement issued by al-Sadr today.

Aftenposten:
- Norway has joined Switzerland in opening up for talks with terrorist leader Osama bin Laden. That doesn't mean Norway is going soft on the fight against terrorism, though, said the country's deputy foreign minister.

Xinhua News:
- Finished home sales in China fell 17.8% from January through July of this year.

Global Enerji:
- Turkey will import 1 million metric tons of fuel oil from Iraq each year that will be mixed with local output, citing Mehmet Uysal, the head of Turkish state oil company Turkiye Petrolleri AO. Turkiye Petrolleri has spent $1 billion exploring for oil off its Black Sea coast and plans to open at least seven wells in the next three years.

Bear Radar

Style Underperformer:

Large-cap Growth +.40%

Sector Underperformers:

Oil Service irlind (-1.57%), Coal (-1.44%) and Energy (-1.28%)

Stocks Falling on Unusual Volume:

GMXR, GDP, CYBX, ENER, VRX, DSW, WSM and BF/B

Stocks With Unusual Put Option Activity:

1) MBI 2) SU 3) DELL 4) ARO 5) MRVL

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.