Today's Headlines

Bloomberg:
- Crude oil is falling again, erasing the year’s gain, after a government reported showed stockpiles of winter fuel are near 7 year highs.
- Boeing Co.(BA) won a multibillion-dollar Homeland Security contract to secure US borders against illegal immigration.
- Morgan Stanley(MS) reported record third-quarter earnings as investment banking, brokerage and credit-card revenue, along with reduced compensation, enabled CEO Mack to give shareholders the biggest profit gain on Wall Street.
- Circuit City(CC) said second-quarter profit increased 700%, beating analysts’ estimates, as the company sold more flat-panel TVs and laptop computers.
- CarMax(KMX), the largest used-car dealer in the US, reported a 44% jump in second-quarter profit and said 2006 earnings will exceed its forecast as rising sales reduced the need for price cuts.
- World steel output climbed 11% in August as Chinese production surged.
Wall Street Journal:
- AstraZeneca Plc(AZN) will still look for acquisitions and licensing deals for some of its new drugs, even as it focuses on its own laboratories.

NY Times:
- Young athletes in extreme sports such as skateboarding, snowboarding and motocross are turning to sports academies and home schooling to both stay competitive and receive an education.

NY Post:
- Amaranth Advisors LLC, the Greenwich, Connecticut-based hedge fund that said it lost about $4.6 billion after wrong bets on natural gas prices, invested in the penny stock market and blind pools, citing SEC filings.

LA Times:
- The Bill & Melinda Gates Foundation donated $1.8 million to a Los Angeles charter school organization that is creating small, community-oriented high schools.

Reporter Herald:
- People are not to blame for global warming, and the notion that they are is perpetuated by the media and by scientists seeking grants, a university professor said Monday. Bill Gray, who works at Colorado State University in Fort Collins, said that global warming is caused by “ocean circulation patterns” and that Earth was actually warmer during some medieval periods. Gray has studied tropical meteorology for more than 40 years.

Interfax:
- Azerbaijan will produce a record 30 million tons of oil in 2006, 35% more than last year. Output in the former Soviet state should rise to 47 million tons next year and 65 million tons a year by 2010, citing Rovnag Abdullaev, the CEO of the state oil producer SOCAR.

AFP:
- The new chief judge in Saddam Hussein’s genocide trial ejected the former Iraqi president from court after he protested the judge’s appointment.

Economic Releases

- None of note

Links of Interest

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Moody’s Corp.(MCO) said it will pay rent of $37.70 a square foot after incentives, or $22.2 million a year, for its new headquarter at 7 World Trade Center, in lower Manhattan’s largest office lease since the Sept. 11 terrorist attacks.
- Marsh & McLennan Cos.(MMC), the world’s largest insurance brokerage, may sell Putnam Investments after managed assets at the mutual-fund unit dropped to their lowest level in more than nine years.
- Thailand’s currency and bonds slumped after the military yesterday seized control of Bangkok from Prime Minister Thaksin Shinawatra. The stock market was closed for the day.
- Crude oil traded near a six-month low in New York after plunging yesterday on signs rising fuel stockpiles and protracted negotiations over Iran’s nuclear program have prompted investment funds to cut their holdings.
- Broadcom Corp., which is restating results to reflect $1.5 billion in costs related to options irregularities, said CFO Ruehle quit, effective immediately.

Wall Street Journal:
- The University of Michigan overtook Dartmouth College as the top US business school, with Carnegie Mellon Univ. placing third, citing a Harris Interactive Poll.

San Francisco Chronicle:
- John Mark Karr, who claimed responsibility for the 1996 death of 6-year-old beauty queen JonBenet Ramsey, would be freed on probation under a plea deal offered today in California.

Financial Times:
- Russia’s threatened suspension of Royal Dutch Shell Plc’s $20 billion Sakhalin-2 natural gas project is causing a global backlash against President Putin’s tightening grip on the country’s energy industry.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (FISV), target $53.
- Reiterated Buy on (AZO), target $124.

CSFB:
- Reiterated Outperform on (FDS), target $53.

Night Trading
Asian Indices are -1.0% to -.50% on average.
S&P 500 indicated +.01%.
NASDAQ 100 indicated +.18%.

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Earnings of Note
Company/EPS Estimate
- (AIR)/.28
- (KMX)/.41
- (CTAS)/.51
- (CC)/.05
- (CMTL)/.32
- (MLHR)/.39
- (MS)/1.37

Upcoming Splits
- None of note

Economic Releases
10:30 am EST
- Bloomberg consensus estimates call for a weekly crude drawdown of 2,000,000 barrels. Gasoline supplies are expected to rise by 650,000 barrels. Distillate inventories are expected to increase by 1,800,000 barrels. Finally, refinery utilization is expected to fall .5%.

2:15 pm EST
- The FOMC is expected to leave the benchmark Fed Funds rate unchanged at 5.25%.

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

Stocks Finish Well Off Session Lows on Afternoon Rebound as Oil Falls Again and Rates Decline

Indices
S&P 1,318.31 -.22%
DJIA 11,540.91 -.12%
NASDAQ 2,222.37 -.60%
Russell 2000 725.45 -.47%
Wilshire 5000 13,170.14 -.26%
S&P Barra Growth 612.75 -.31%
S&P Barra Value 703.39 -.13%
Morgan Stanley Consumer 649.59 +.23%
Morgan Stanley Cyclical 812.73 -.72%
Morgan Stanley Technology 517.64 -.88%
Transports 4,406.82 -.54%
Utilities 426.11 +.21%
Put/Call 1.38 +40.82%
NYSE Arms 1.34 +77.58%
Volatility(VIX) 11.98 +1.70%
ISE Sentiment 113.0 +41.25%
US Dollar 85.93 +.14%
CRB 303.04 -1.74%

Futures Spot Prices
Crude Oil 61.59 -3.46%
Unleaded Gasoline 150.25 -4.88%
Natural Gas 5.07 +2.63%
Heating Oil 169.55 -1.75%
Gold 578.90 -.74%
Base Metals 223.05 +1.21%
Copper 336.00 -.46%
10-year US Treasury Yield 4.72% -1.57%

Leading Sectors
Airlines +3.31%
Computer Hardware +.79%
Retail +.73%

Lagging Sectors
Semis -2.20%
Coal -2.71%
Gold & Silver -4.24%

Evening Review
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Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- Oil and gas fell to the lowest in almost six months after President Bush said he will give diplomacy a chance to end a dispute with Iran over the country’s nuclear program.
- Oracle Corp.(ORCL) said first-quarter profit rose more than analysts estimated, signaling $20 billion in acquisitions is paying off. The shares surged 9%.
- Medtronic’s(MDT) steel replacement for worn spinal disks in the neck should be approved for sale in the US if the device maker agrees to complete follow-up testing and safety reviews, US advisers said.
- The Thai baht fell the most in four years after the military seized control of Bangkok and Prime Minister Thaksin Shinawatra declared a state of emergency.

BOTTOM LINE: The Portfolio finished about even today as losses in my Internet and Semi longs offset gains in my Commodity shorts. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was negative today as the advance/decline line finished lower, sector performance was mixed and volume was above average. Measures of investor anxiety were mostly higher into the close. Overall, today's market performance was slightly negative as the major averages finished well off session lows, but still lower. The 10-year yield finished almost 8 basis points lower, to 4.72%. In my opinion, investors are still focusing too much on the possibility of economic growth slowing too much and not enough on the huge deceleration in inflation that is taking place. As I said a few weeks ago, nominal GDP has been booming. A significant deceleration in inflation will result in the GDP deflator subtracting less from growth, which should lead to moderate GDP growth and inflation readings. I expect to see stocks build on this afternoon's rebound tomorrow. As most, I believe the Fed will remain on hold tomorrow. Its ensuing policy statements, however, will likely be more dovish than most expect. Falling commodity prices, the continuing housing slowdown, decelerating inflation readings, a firm U.S. dollar and declining inflation expectations will prompt the more dovish comments that I anticipate.

Stocks Lower into Final Hour on Yahoo! Forecast and Thailand Worries

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Internet and Semi longs. I added to my Google(GOOG) long and took profits in another long today, thus leaving the Portfolio 100% net long. The tone of the market is negative today as the advance/decline line is lower, most sectors are lower and volume is above average. The Johnson Redbook same-store sales index rose 3.9% year over year last week vs. a 3.8% rise the prior week. The long-term average is a gain of around 2.8%. This is just more evidence that the anticipated collapse in consumer spending won't materialize anytime soon, even as investors continue to price this into stocks. A healthy labor market, falling energy prices, lower long-term interest rates, decelerating inflation, a rising stock market and less irrational pessimism will continue to more than offset housing over the intermediate term. The Morgan Stanley Retail Index (MVRX) has surged 14.1% in less than two months. I expect continued outperformance by the sector during the fourth quarter. I expect US stocks to trade modestly higher into the close from current levels on short-covering, lower energy prices, declining interest rates and bargain hunting.