Stocks Finish at Session Lows as Hurricane Rita Upgraded to Category 5

Indices
S&P 500 1,210.20 -.91%
DJIA 10,378.03 -.99%
NASDAQ 2,106.64 -1.16%
Russell 2000 649.94 -1.62%
DJ Wilshire 5000 12,070.37 -1.01%
S&P Barra Growth 578.56 -.77%
S&P Barra Value 627.45 -1.05%
Morgan Stanley Consumer 573.39 -.93%
Morgan Stanley Cyclical 712.88 -.78%
Morgan Stanley Technology 493.70 -1.11%
Transports 3,597.05 +.44%
Utilities 421.78 -1.28%
Put/Call 1.12 +6.67%
NYSE Arms 1.46 -16.02%
Volatility(VIX) 13.79 +9.10%
ISE Sentiment 135.00 -30%
US Dollar 88.00 -.68%
CRB 327.04 +.58%

Futures Spot Prices
Crude Oil 67.50 +1.03
Unleaded Gasoline 210.30 +2.43%
Natural Gas 12.88 2.27%
Heating Oil 207.60 +1.83%
Gold 475.80 +.55%
Base Metals 129.87 +2.17%
Copper 170.90 +.15%
10-year US Treasury Yield 4.16 -.19%

Leading Sectors
Gold & Silver +3.38%
Steel +1.56%
Energy +1.36%

Lagging Sectors
Defense -2.41%
Restaurants -2.76%
Airlines -3.75%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on LUV and QCOM.
- Reiterated Underperform on SIRI.

Afternoon/Evening Headlines
Bloomberg:
- The US House approved a $6.1 billion tax cut for survivors of Hurricane Katrina that includes incentives for those who shelter evacuees.
- McDonald’s will sell a minority stake in its Chipotle Mexican Grill in an IPO during the first quarter of 2006.
- The US dollar dropped against the euro for a second day in Asia on concern Hurricane Rita will exacerbate the damage caused by Hurricane Katrina, further damping consumer spending and slowing US economic growth.
- Hurricane Rita strengthened into a Category 5 storm as it moved across the Gulf of Mexico toward Texas and Louisiana, surpassing the power Katrina had when it swept ashore last month and became the most expensive natural disaster in US history.

BOTTOM LINE: The Portfolio finished higher today on gains in my Internet longs and ETF shorts. I exited an existing long and added to my TLT long in the afternoon, thus leaving the Portfolio market neutral. The tone of the market was negative today as the advance/decline line finished substantially lower, almost every sector declined and volume was slightly above average. Measures of investor anxiety were higher into the close. Overall, today’s market action was slightly negative. I expect a tradable bottom to develop over the next two days from lower levels. Initial jobless claims will spike again tomorrow as more Katrina victims are able to file.

Stocks Lower Mid-day ahead of Hurricane Rita

Indices
S&P 500 1,214.45 -.59%
DJIA 10,422.46 -.56%
NASDAQ 2,115.01 -.77%
Russell 2000 653.42 -1.09%
DJ Wilshire 5000 12,110.08 -.69%
S&P Barra Growth 580.55 -.43%
S&P Barra Value 629.34 -.76%
Morgan Stanley Consumer 575.31 -.60%
Morgan Stanley Cyclical 714.80 -.53%
Morgan Stanley Technology 495.17 -.83%
Transports 3,606.62 +.62%
Utilities 422.56 -1.10%
Put/Call 1.20 +14.29%
NYSE Arms 1.37 -21.46%
Volatility(VIX) 13.59 +7.52%
ISE Sentiment 136.00 -30.0%
US Dollar 88.09 -.58%
CRB 327.18 +.62%

Futures Spot Prices
Crude Oil 66.85 +1.06%
Unleaded Gasoline 205.00 +3.71%
Natural Gas 12.60 +1.02%
Heating Oil 203.75 +1.18%
Gold 474.10 +.87%
Base Metals 129.87 +2.17%
Copper 170.50 +2.34%
10-year US Treasury Yield 4.18% -1.33%

Leading Sectors %
Gold & Silver +3.10%
Steel +2.26%
Coal +1.13%

Lagging Sectors
Restaurants -1.88%
Defense -2.14%
Airlines -3.16%

BOTTOM LINE: The Portfolio is higher mid-day on gains in my Internet longs and ETF shorts. I trimmed a few existing longs and added to my IWM/QQQQ shorts this morning, thus leaving the Portfolio market neutral. The tone of the market is negative as the advance/decline line is substantially lower, most sectors are declining and volume is about average. Measures of investor anxiety are higher. Today’s overall market action is slightly negative given the risks posed by Hurricane Rita. During the week ended Sept. 16, the financial industry saw the greatest net insider selling in the S&P 500. Insiders sold $218,257,450 worth of stock and bought $585,819. I expect US stocks to trade mixed-to-lower from current levels into the close on increasing worries over economic growth and Hurricane Rita.

Today's Headlines

Bloomberg:
- Qualcomm raised its fourth-quarter sales and profit forecasts on better-than-expected phone chip shipments.
- The risks to world economic growth are “slanted to the downside” with record oil prices posing a particular threat, the IMF said today.
- Crude oil and gas are jumping as Hurricane Rita barreled toward the Texas coast, threatening the biggest concentration of US refineries.
- Billionaire investor Kirk Kerkorian’s Tracinda, the third largest investor in GM, said it may ask for representation on the automaker’s board.
- US Treasuries are rising, led by the biggest gain in 10-year notes this month, on concern Hurricane Rita and rising energy prices will weigh on the economy.
- The US dollar is falling the most in three weeks against the euro and dropped versus the yen on concern Hurricane Rita will add to damage caused by Katrina, damping consumer spending and slowing US economic growth.

Wall Street Journal:
- Procter & Gamble turned to in-store marketing to offset declining attention among consumers for print and television advertising.
- Raising the levees protecting New Orleans from a new storm surge would cost billions of dollars, threaten vulnerable marshlands, and probably set off lawsuits from homeowners whose properties would have to be confiscated.
- Sales growth is slowing at Dollar Tree Stores, Fred’s, and Family Dollar due to competition from discount stores such as Target.

NY Times:
- New Orleans flood walls that were built over the past several decades were below US Army Corps of Engineers standards.
- Some US House Republicans today plan to suggest budget cuts of more than $500 billion over 10 years to offset spending in the wake of Hurricane Katrina.

ESPN.com:
- Nike has reached an agreement with Take-Two Interactive Software to feature its shoes in a basketball video game.

Detroit News:
- Ford Motor plans to increase the proportion of Ford, Mercury and Lincoln models powered by hybrid engines to half by the end of the decade.

NY Post:
- Bank of NY denied Calpine access to the proceeds of a $117 million asset sale after bondholders claimed the energy company is using funds that were supposed to be set aside for asset purchases for other purposes.

Gasoline Inventories Soar

- The EIA reported that crude oil inventories fell 322,000 barrels versus estimates of a rise of 1M barrels. Gasoline inventories rose 3.47M barrels versus estimates of a decline of 250,000 barrels. Distillate inventories rose 820,000 barrels versus estimates of a 500,000 barrel decline.

BOTTOM LINE: Oil is moving higher on the report as traders focus on Hurricane Rita and ignore the gas build.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Ballard Power Systems, trying to find more users for its low-polluting automotive fuel cells, is talking to China about investing in its operations, Ballard’s CEO said.
- The US dollar reached a six-week high against the yen in Asia after the Fed raised interest rates for an 11th straight time and signaled further increases are likely.
- Hurricane Rita strengthened as it entered the Gulf of Mexico, prompting concern among forecasters that the storm could become more powerful than Hurricane Katrina, the most costly US disaster.
- Crude oil futures are rising in NY as oil producers in the Gulf of Mexico, including ConocoPhillips, Exxon Mobil, and Marathon Oil, evacuated staff and shut platforms in the path of Hurricane Rita.
- Japan’s economic recovery is “becoming sustainable” as rising corporate profits help spark business investment and consumer spending, Finance Minister Sadakazu Tanigaki said.

Wall Street Journal:
- Dartmouth’s Tuck School was ranked as the top national business school this year by recruiters, according to WSJ and Harris Interactive.

London-based Times:
- Goldman Sachs Group bankers will receive record pay after the investment bank reported its most profitable quarter ever.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on ALL, AIG and BC.

Night Trading
Asian Indices are -.25% to +.50% on average.
S&P 500 indicated -.11%.
NASDAQ 100 indicated -.13%.

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Earnings of Note
Company/EPS Estimate
AZO/2.83
BBBY/.46
BMET/.41
KMX/.37
CTAS/.48
CAG/.23
FDX/1.17
MWD/1.05

Upcoming Splits
None of note

Economic Releases
None of note

BOTTOM LINE: Asian indices are mostly lower as exporting shares in the region come under pressure from another jump in energy prices. I expect US equities to open modestly lower on rising apprehension over US growth and Hurricane Rita. The Portfolio is 50% net long heading into the day.