Wednesday Watch

Late-Night Headlines
Bloomberg:
- Red Hat Inc.(RHT), the world’s largest seller of Linux operating-system programs, said profit rose 64% after sales of new products topped analysts’ estimates. The shares surged 5.1% in extended trading.
- Treasury Secretary Henry Paulson named a committee of asset managers and a panel of investors to write guidelines intended to help demystify hedge funds and reduce risk in US financial markets.
- Japan, the world’s third-largest oil consumer, imported 3.6% less crude oil in August compared with a year earlier. Imports of oil products, a category that includes gasoline and naphtha, slipped 2.8%. Liquefied petroleum gas imports rose 5.3%.
- Goldcorp Inc.(GG), the world’s third-largest gold producer by market value, plans to spend more than $3 billion to boost output in the next five years rather than buy new assets. “We buy low and sell high, so as the gold price increases, we’re building mines and selling our gold,” CEO McArthur said. “We’re not in purchasing mode, we’re in harvest mode.”
- Ethanol in Chicago fell, matching a two-year low, on concern supplies of the additive are building while the product’s transportation infrastructure lags.
- Indian Finance Minister Palaniappan Chidambaram said policy makers have few options to deal with a rupee exchange rate that is “way above the comfort level” because the currency is set by open markets.

MarketWatch.com:
- Bye-bye subprime loans, hello junk bonds.

NY Times:
- Halo 3 Arrives, Rewarding Gamers, and Microsoft.

CNNMoney.com:
- How to play the real estate bounce-back. 10 cities that are set to rise.

CNBC.com:
- Gloom Over Holiday Sales My Be Overdone.

Financial Times:
- Sovereign wealth funds have invested an estimated $35 billion in the shares of banks, securities houses and asset managers since the beginning of 2006 in a sign of the growing clout that state-backed investment vehicles are wielding in the financial sector.

Reuters:
- NYSE Euronext would be interested in expanding its reach in the Middle East, citing CEO John Thain.
- Steve Case, the founder of the AOL Internet service, is backing a new online payment company that promises to let users transfer funds for free and offer a credit card with sharply lower fees for merchants.
- Vilified as a Holocaust denier, a supporter of terrorism and a backer of Iraqi insurgents, the president of Iran was actually able to make New Yorkers burst into laughter – but not at a joke.

Business Standard:
- Google Inc.(GOOG) and Reliance Communications are in talks to lease part of the Indian company’s Pacific undersea cable network.

China Daily:
- China’s central bank may raise the interest rate on mortgage loans this week to curb rising home prices and property speculation. The People’s Bank of China may increase the rate to 1.1 times the nation’s 7.29% benchmark one-year lending rate. The rate for a five-year mortgage loan could reach as high as 8.61%.

Late Buy/Sell Recommendations
Citigroup:
- Rated (RIMM) Buy, target $115.

Night Trading
Asian Indices are unch. to +.1.0% on average.
S&P 500 futures +.22%.
NASDAQ 100 futures +.25%.

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Earnings of Note
Company/EPS Estimate
- (BBBY)/.52
- (CPRT)/.35
- (GRB)/.11
- (PAYX)/.39

Upcoming Splits
- (FCSX) 3-for-2
- (LPHI) 5-for-4
- (NOV) 2-for-1

Economic Releases
8:30 am EST
- Durable Goods Orders for August are estimated to fall 4.0% versus a 6.0% increase in July.
- Durables Ex Transports for August are estimated to fall 1.0% versus a 3.8% gain in July.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil drawdown of -2,150,000 barrels versus a -3,874,000 barrel decline the prior week. Gasoline supplies are expected to fall by -325,000 barrels versus a 417,000 barrel build the prior week. Distillate inventories are estimated to rise by 1,060,000 barrels versus a 1,564,000 barrel increase the prior week. Finally, Refinery Utilization is expected to fall -1.0% versus a -.97% decline the prior week.

Other Potential Market Movers
- The Fed’s Poole speaking, weekly MBA Mortgage Applications report, (SPW) analyst meeting, Piper Jaffray Solar Power Conference, CSFB Chemical Conference, UBS Global Life Sciences Conference, Merrill Lynch Global Power/Gas Conference, Thomas Weisel Consumer Conference, RBC Financial Institutions Conference and Jeffries Shipping/Logistics/Offshore Services Conference could also impact trading today.

BOTTOM LINE: Asian indices are higher, boosted by financial and technology stocks 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 Slightly Higher, Boosted by Tech Shares

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In Play

Stocks Slightly Higher into Final Hour, Led by Tech

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semi longs, Computer longs, Medical longs and Biotech longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is slightly negative today as the advance/decline line is mildly lower, sector performance is mixed and volume is about average. The 10-year TIPS spread is falling again as inflation worries continue to diminish rapidly. It is now down to 2.27, falling 8 basis points from the Monday before the Fed lowered rates. Fed funds futures now imply an 88% chance that the Fed lowers its benchmark rate to 4.5% in October vs. only a 12% chance of no change. The JPMorgan Emerging Market Debt Index is now 0.93% higher the last five days, and the Bear Stearns High Yield Index is up 1.4% over that period. The speculative grade credit default swap index is down 13.7% over the last five days, as well. Oil is falling $1.47 per barrel, notwithstanding more dollar weakness. Oil looks like it has topped for the year finally, and I still expect it to fall meaningfully over the coming months, which should provide some relief to consumers. Once again today, many true growth stocks are posting meaningful gains today. I continue to believe that economic growth will remain modestly below trend over the intermediate-term, notwithstanding Fed cuts, which should continue to propel growth stock outperformance. Given today's news, the market's performance is very impressive. This is likely the result of far too many bulls still being underinvested and many bears being way too short, given the stabilization in the credit markets and that the Fed for once is ahead of the curve. P/E multiple expansion looks to be under way in the growth stock universe. However, the S&P 500 is now trading at 15.9x forward estimates, down from 16.1x at the beginning of the year. I hear many pundits say the market isn't cheap, focusing solely on the P/E. First of all, the market has never had to be cheap to rise. Moreover, inflation expectations have fallen substantially over the last year. Just a few months ago, many investors were talking as if a 6% yield on the 10-year was a given. It is now at 4.60%. Many other variables go into the market multiple that investors are will to pay, as well. While earnings growth is slowing, I see few signs that it is about to fall off a cliff, which in my opinion, makes many stocks cheap given the current macro backdrop. If earnings growth stabilizes around current levels, or even picks up a bit due to the Fed rate easing cycle, I expect to see meaningful P/E multiple expansion in the broad market next quarter. The NYSE reported recently that short interest on the exchange, from mid-August through mid-September, fell from 12.47 billion shares to 11.84 billion shares. The 5.0% decrease still leaves NYSE short interest up a stunning 23.4% since mid-February, the largest seven-month percentage jump since at least 1991, when Bloomberg began tracking. I continue to believe the recent parabolic rise in short interest was mainly the result of the avalanche of capital that had flowed into global market neutral funds, which help to pump air into the current U.S. "negativity bubble." Past poor performance and recent events have likely ensured that a significant portion of the capital allocated to these funds will flow back into more positively correlated U.S. stock strategies going forward. That process may already be beginning and could account for some of the recent decline in short interest. It is also noteworthy that public short sales exploded to record highs during the recent correction. Here are the 25 NYSE stocks with the largest percentage increase in their short interest relative to their float from mid-August through mid-September:

1. Jones Apparel Group (JNY, +18.4%)
2. PharMerica (PMC, +12.8%)
3. ExpressJet Holdings (XJT, +11.8%)
4. Rohm & Haas (ROH, +11.6%)
5. WCI Communities (WCI, +9.3%)
6. M/I Homes (MHO, +8.4%)
7. Beazer Homes USA (BZH, +8.1%)
8. Jones Lang Lasalle (JLL, +7.4%)
9. W.W. Grainger (GWW, +7.4%)
10. Deerfield Triarc Capital (DFR, +6.9%)
11. Anworth Mortgage Asset (ANH, +6.4%)
12. Arbor Realty Trust (ABR, +6.1%)
13. MetroPCS Communications (PCS, +5.1%)
14. Thornburg Mortgage (TMA, +4.8%)
15. Georgia Gulf (GGC, +4.7%)
16. Brookfield Homes (BHS, +4.5%)
17. Landry's Restaurants (LNY, +4.3%)
18. USG Corporation (USG, +4.2%)
19. Affiliated Managers Group (AMG, +3.8%)
20. Archstone-Smith Trust (ASN, +3.8%)
21. Marsh & Mclennan Companies (MMC, +3.8%)
22. Parker-Hannifin (PH, +3.7%)
23. Delta Air Lines (DAL, +3.6%)
24. Dillard's (DDS, +3.6%)
25. Marinemax (HZO, +3.6%)

I expect US stocks to trade modestly higher into the close from current levels on short-covering, lower energy prices, strength in the tech sector and investment manager performance anxiety.

Confidence Falls, Existing Home Sales Better-Than-Expected

- Consumer Confidence for September fell to 99.8 versus estimates of 104.3 and an upwardly revised 105.6 in August.

- Existing Home Sales for August fell to 5.5M versus estimates of 5.48M and 5.75M in July.

BOTTOM LINE: Consumer confidence fell more than forecast in September, Bloomberg reported. The Present Situation component of the index fell to 121.7 from 130.1, but remains relatively high. The Expectations component fell to 85.2 from 89.2 in August. The price of regular unleaded gasoline, which reached as high as $3.05 a gallon in July, slid to $2.81 as of yesterday. The main reason consumer confidence came in below estimates was due to the huge drop in the New England region from 105.4 to 79.7. Confidence actually soared in the Southeast Central region from 101.60 to 121.0 and rose in the Mid-Atlantic, Northwest Central and Southwest Central regions. I continue to believe both main gauges of consumer sentiment will move back near cycle highs over the intermediate-term as stocks hit new record highs, interest rates remain low, inflation decelerates further, energy prices fall meaningfully, housing fears subside, wages continue to substantially outpace inflation and unemployment remains historically low.

Sales of previously owned US homes fell in August, Bloomberg reported. However, the median home price rose .2% to $224,500. The Case-Shiller Home Price Index fell 3.9% year-over-year in July, however this index is still 98.4% higher from when the stock market bubble burst in 2000. Supplies of existing homes, at the current sales pace, came in at 10 months’ worth versus 9.5 months in July. I continue to believe home sales are in the process of stabilizing at lower, but still high by historic standards, levels. Home construction will remain muted over the intermediate-term as homebuilders work down inventories.

Links of Interest

Market Snapshot Commentary
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Tuesday Watch

Late-Night Headlines
Bloomberg:
- Intercontinental Exchange(ICE), Tesoro Corp.(TSO), Teradata Corp. and Expedia Inc.(EXPE) will join the S&P 500 Index., S&P said today.

Wall Street Journal:
- Although global economic fallout from the US subprime-mortgage crisis is likely to be protracted, governments shouldn’t “rush to regulate everything,” said the International Monetary Fun’s top financial-review official, Jaime Caruana.

MarketWatch.com:
- Chinese stock investors warming to US managers. With opening of outside markets to individuals, fund firms flock to mainland.
- Wall Street says buy EMC for VMware. Analysts bullish on both businesses; VMware’s valuation a concern.

IBD:
- Cable TV Firms’ Next Evolution: Business Phone Service Provider.

Financial Times:
- Arcelor Mittal(MIT) is to spend $35 billion adding to the capacity of its steelmaking plants around the world, lakshmi Mittal, the company’s CEO and main owner, said.

Berliner-Zeitung:
- Q-Cells AG CEO Anton Milner said he expects the solar-power industry to grow at least 40% a year, double the rate forecast by the German association that represents the industry.

Late Buy/Sell Recommendations
Morgan Stanley:
- Reiterated Overweight on (LOW), target $38.

Night Trading
Asian Indices are -.25% to +.50% on average.
S&P 500 futures -.29%.
NASDAQ 100 futures -.25%.

Morning Preview
US AM Market Call
NASDAQ 100 Pre-Market Indicator/Heat Map
Pre-market Commentary
Pre-market Stock Quote/Chart
Before the Bell CNBC Video(bottom right)
Global Commentary
WSJ Intl Markets Performance
Commodity Movers
Top 25 Stories
Top 20 Business Stories
Today in IBD
In Play
Bond Ticker
Economic Preview/Calendar
Daily Stock Events
Macro Calls
Upgrades/Downgrades
Rasmussen Business/Economy Polling
CNBC Guest Schedule

Earnings of Note
Company/EPS Estimate
- (DFS)/.38
- (FDS)/.56
- (FUL)/.44
- (RHT)/.17
- (RECN)/.29
- (SMSC)/.39
- (SRR)/.29

Upcoming Splits
- (FCSX) 3-for-2
- (LPHI) 5-for-4
- (NOV) 2-for-1

Economic Releases
10:00 am EST
- Consumer Confidence for September is estimated to fall to 104.3 versus 105.0 in August in August.
- Existing Home Sales for August are estimated to fall to 5.48M versus 5.75M in July.

Other Potential Market Movers
- The Fed’s Plosser speaking, weekly retail sales reports, CaseShiller Home Price Index, Richmond Fed Manufacturing Index, (LOW) analyst conference, (AMAT) solar power, Piper Jaffray Solar Power Conference, CSFB Chemical Conference, UBS Global Life Sciences Conference, Merrill Lynch Global Power/Gas Conference, Thomas Weisel Consumer Conference, RBC Financial Institutions Conference and Jeffries Shipping/Logistics/Offshore Services Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by automaker and mining stocks 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.