Stocks Finish Sharply Higher on Short-Covering and Quarter-End Window Dressing

Indices
S&P 500 1,227.68 +.89%
DJIA 10,552.78 +.76%
NASDAQ 2,141.22 +1.22%
Russell 2000 665.03 +1.37%
DJ Wilshire 5000 12,255.69 +.92%
S&P Barra Growth 586.11 +.73%
S&P Barra Value 637.35 +1.04%
Morgan Stanley Consumer 584.44 +.70%
Morgan Stanley Cyclical 725.61 +.53%
Morgan Stanley Technology 502.04 +1.06%
Transports 3,718.42 +1.70%
Utilities 432.98 +.92%
Put/Call .78 +6.85%
NYSE Arms .78 -1.14%
Volatility(VIX) 12.24 -3.09%
ISE Sentiment 169.00 +18.18%
US Dollar 89.40 -.08%
CRB 334.85 +.46%

Futures Spot Prices
Crude Oil 66.74 -.07%
Unleaded Gasoline 221.10 -1.80%
Natural Gas 14.09 -.75%
Heating Oil 212.47 -.77%
Gold 475.40 -.08%
Base Metals 131.13 +.54%
Copper 173.95 unch.
10-year US Treasury Yield 4.29% +.92%

Leading Sectors
Disk Drives +2.37%
Homebuilders +1.93%
Software +1.90%

Lagging Sectors
Broadcasting -.45%
Airlines -.63%
HMOs -2.30%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on FCX and SGMS.

Afternoon/Evening Headlines
Bloomberg:
- The New Orleans Police Dept. is investigating 12 officers for allegedly looting homes around the city during the Hurricane Katrina rescue and recovery effort.
- Gasoline futures retreated from a four-week high on expectations rising imports will help make up for output lost from refineries that are shut because of hurricane damage.
- President Bush’s job approval rating rose after he took a more visible role in the government response to Hurricane Rita than he did for Hurricane Katrina, a CNN/USA Today/Gallup poll showed.

Wall Street Journal:
- Bats were the source of the deadly SARS virus that killed more than 700 people in 2002 in an epidemic that began in southern China.

AP:
- Pictures showing abuses of Abu Ghraib prisoners in Iraq must be released to the public, a federal judge in NY ruled today. US District Judge Alvin Hellerstein ruled in favor of the ACLU and against the US military, which argued that the unnecessary images might aid al-Qaeda recruitment and result in more loss of life in the Middle East.

Die Welt:
- UPS will step up acquisitions in Europe and may consider a bid for Dutch package deliverer TNT NV.

BOTTOM LINE: The Portfolio finished substantially higher today on gains in my Internet longs, Semiconductor longs, Medical longs and Medical Information System longs. I did not trade in the afternoon, thus leaving the Portfolio 100% net long. The tone of the market was positive today as the advance/decline line finished at session highs, most sectors rose and volume was above average. Measures of investor anxiety were mostly lower into the close. Overall, today’s market action was very positive. The AAII % Bulls fell to 31.88% this week from 39.47% the prior week; this reading is approaching depressed levels. Likewise, the % Bears rose to 39.13% from 32.46% the prior week; this is approaching elevated levels. I expect more choppy trading over the next few weeks as bullish sentiment becomes depressed. This should pave the way for an upside breakout in late October/early November.

Stocks Higher Mid-day on Better-than-expected Economic Data

Indices
S&P 500 1,225.07 +.67%
DJIA 10,525.87 +.51%
NASDAQ 2,134.65 +.91%
Russell 2000 662.20 +.94%
DJ Wilshire 5000 12,227.18 +.69%
S&P Barra Growth 585.04 +.54%
S&P Barra Value 636.07 +.84%
Morgan Stanley Consumer 583.54 +.55%
Morgan Stanley Cyclical 725.14 +.46%
Morgan Stanley Technology 501.83 +1.02%
Transports 3,714.66 +1.60%
Utilities 432.96 +.92%
Put/Call .83 +13.70%
NYSE Arms .75 -3.20%
Volatility(VIX) 12.32 -2.45%
ISE Sentiment 179.00 +25.17%
US Dollar 89.38 -.10%
CRB 335.03 +.51%

Futures Spot Prices
Crude Oil 66.80 +.68%
Unleaded Gasoline 225.00 -3.82%
Natural Gas 14.40 +2.20%
Heating Oil 209.00 -2.39%
Gold 475.80 +.57%
Base Metals 131.13 +.54%
Copper 173.95 -.49%
10-year US Treasury Yield 4.28% +.83%

Leading Sectors %
Internet +1.72%
Disk Drives +1.71%
Software +1.52%

Lagging Sectors
Gaming -.54%
Airlines -.68%
HMOs -2.24%

BOTTOM LINE: The Portfolio is substantially higher mid-day on gains in my Internet longs, Semiconductor longs, Medical longs and Medical Information Systems longs. I exited my QQQQ/IWM shorts this morning and added to my existing longs including GOOG, NTES, BBY, SKYW, MDRX, BRCM and ISRG, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are higher and volume is slightly above average. Measures of investor anxiety are mixed. Today’s overall market action is slightly positive given the bounce in long-term rates and better-than-expected economic data. Despite the GOP's current woes, Tradesports.com reports that a Republican president is likely in 2008. The percentage chance of a Republican winning the 2008 presidential election has risen to 50.7% over the last couple of months from a low of 45.0%. The chances of a Democrat winning have fallen to 48.5% from a high of 55.0%. I expect US stocks to trade mixed-to-higher from current levels into the close on short-covering and quarter-end window dressing.

Today's Headlines

Bloomberg:
- The cost of leasing a container ship has dropped almost 20% since a peak in June, Lloyd’s List reported.
- E*Trade Financial agreed to buy BrownCo, JPMorgan Chase’s online brokerage, for $1.6 billion in cash.
- The US, which imports three-fifths of the world’s beluga caviar, will ban shipments of the eggs from the Caspian Sea region to protect falling sturgeon stocks.
- The human immunodeficiency virus that causes AIDS appears to have weakened since the start of the pandemic more than two decades ago, according to a Belgian study published today in the journal AIDS.
- GE agreed to buy IDX Systems, a healthcares information technology provider, for about $1.2 billion.
- Ford will eliminate half its suppliers and sign long-term contracts with the rest to reduce costs and revive profit.
- Caterpillar may add $1 billion in sales over the next two years as the Gulf Coast cleans up and rebuilds from Hurricane Katrina, analysts said.
- John G. Roberts, backed by united Republicans in the US Senate and half the Democrats, won confirmation to be the nation’s 17th chief justice and take his place as the first new member of the Supreme Court in 11 years.
- US Treasuries are falling after a government report showed weekly jobless claims fell more than forecast.
- Gasoline futures retreated from a four-week high as rising imports may help make up for output lost from refineries that were shut because of hurricane damage.

Wall Street Journal:
- Vonage Holdings, a closely held provider of internet-based calling, has chosen Citigroup, UBS, Deutsche Bank and Bear Stearns to manage its proposed IPO.
- Victims of Hurricane Katrina have expressed praise for relief provided by the Salvation Army.
- General Electric, Bechtel and American Electric Power may announce today that they will start planning engineering and design of the first US big coal-fired power plant that would use cleaner-burning technologies.
- Tracking devices supplied by Bulldog Technologies and SC-integrity are helping shippers cut down on a boom in cargo theft.
- Walt Disney may announce today that it plans to sell a $49 digital-audio player aimed at children between 6 and 12 years of age to tap into growing demand for electronics.

NY Times:
- Guidant’s handling of problems with its heart devices may be under a US criminal probe.
- Some US middle-class families are paying less for houses with the help of government agencies, private developers, not-for-profit groups and employers.

LA Timest:
- Spain is investing $100 million in a campaign to improve business ties with the US and overcome recent political tensions between the two countries.

US GDP Growth Streak Best Since 1986, Jobless Claims Starting to Fall Again

- Final 2Q GDP rose 3.3% versus estimates of 3.3% and a prior estimate of 3.3%.
- Final 2Q GDP Price Index rose 2.6% versus estimates of a 2.4% gain and prior estimates of a 2.4% gain.
- Final 2Q Personal Consumption rose 3.4% versus estimates of 3.0% and prior estimates of a 3.0% increase.
- Initial Jobless Claims for last week fell to 356K versus estimates of 418K and 435K the prior week.
- Continuing Claims rose to 2802K versus estimates of 2708K and 2658K prior.

BOTTOM LINE: The US economy grew at an above-average 3.3% annual rate in the second quarter, fueled by homebuilding and consumer spending, indicating the economy was strong entering the third quarter, before twin hurricanes slowed growth this month, Bloomberg reported. Growth in the US economy has now exceeded 3% for nine straight quarters, the longest streak since the 13 quarters that ended in March 1986. The core personal consumption expenditures index, Greenspan’s favorite inflation gauge, rose 1.7% versus a 2.4% over the first three months of the year. GDP will temporarily dip below average rates this quarter before rebounding back to more vigorous levels into year-end.

Workers dislocated by Hurricane Katrina pushed first-time claims for unemployment benefits to the highest in more than two years, Bloomberg said. About 103,000 claims last week were from people affected by the hurricanes. 214,000 people have now filed claims that were dislocated from the hurricanes. The four-week moving-average of claims rose to 376,250 from 347,250 the prior week. The insured employment rate, which tracks the unemployment rate, rose 2.1% from 2.0%. It appears as thought the worst is over for hurricane-related jobless claims. I expect claims to move modestly lower through year-end.

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Thursday Watch

Late-Night Headlines
Bloomberg:
- Japan’s retail sales rose almost twice as much as expected in August as consumers spent their higher wages and bonuses, adding to signs that the world’s second-largest economy will expand for a fourth quarter.
- GE will buy a 7% stake in China’s Shenzhen Development Bank valued at $100 million.
- Police in London are investigating a number of new potential terrorist suspects who may be planning further attacks.
- Samsung Electronics plans to invest $33 billion in the next seven years on factories to triple chip sales.

China Business News:
- Shanghai’s home supply jumped 50% this month, while prices dropped 17%, citing Shanghai Property Exchange Center.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on MWV, HMA, DNA and MWV.
- Reiterated Underperform on EK.

Night Trading
Asian Indices are +.50% to +1.0% on average.
S&P 500 indicated +.02%.
NASDAQ 100 indicated +.09%.

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Earnings of Note
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FDO/.17
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Upcoming Splits
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Economic Releases
8:30 am EST
- Final 2Q GDP is estimated to rise 3.3% versus a prior estimate of a 3.3% increase.
- Final 2Q GDP Price Index is estimated to rise 2.4% versus a prior estimate of a 2.4% increase.
- Final 2Q Personal Consumption is estimated to rise 3.0% versus a prior estimate of a 3.0% gain.
- Initial Jobless Claims for last week are estimated to fall to 418K versus 432K the prior week.
- Continuing Claims are estimated to rise to 2708K versus 2666K prior.

BOTTOM LINE: Asian indices are higher, boosted by cyclical companies in the region on strong economic reports from the US and Japan. I expect US equities to open modestly higher on gains in Asia and quarter-end window dressing. The Portfolio is 50% net long heading into the day.