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Friday Watch

Late-Night Headlines
Bloomberg:
- Sharp Corp., Japan’s biggest maker of liquid-crystal display televisions, climbed to the higher in more than a month on the Tokyo Stock Exchange after UBS AG raised its rating to “buy,” citing demand for large panels.
- Investors added $466 million to high-yield corporate bond funds, the biggest inflow in more than two years, JPMorgan Chase(JPM) said, citing figures from AMG Data Services. Net inflows in the week ended September 26 compared with net outflows of $32 million a week earlier and withdrawals of $154 million in the week ended September 12, according to a JPMorgan report yesterday.
- Blackstone Group LP(BX) and other private-equity firms will accumulate more pension-fund money than real-estate and hedge funds within three years, a Citigroup survey showed.
- Japan’s industrial output surged at the fastest pace in almost four years and household spending rebounded, signaling the economy may weather a US slowdown.

MarketWatch.com:
- Lenders are back in business after winning concessions.

NY Times:
- Bush Moves to Ease Flight Delays.

CNNMoney.com:
- Real estate investors are betting on bargains in depressed markets they think are ready to bounce back.

CNBC.com:
- Fed’s Mishkin Says Inflation Is Low Thanks to Policy.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (VZ), target $49.
- Reiterated Buy on (DVA), target $75.
- Reiterated Buy on (ZION), target $89.

BMO Capital:
- Rated (GILD) Outperform, target $51.
- Rated (VRTX) Outperform, target $44.
- Rated (PHRM) Outperform, target $57.
- Rated (MOGN) Outperform, target $33.
- Rated (MEDX) Underperform, target $11.

Business Week:
- Time Warner Telecom(TWTC), a provider of voice and Internet services for businesses, shows potential for “fast growth,” citing Joan Lappin, president of Gramercy Capital Management. She bought the stock at $5 and expects it to reach $35 in 18 months.
- Plum Creek Timber(PCL), a real estate investment trust that owns US timberland, could reach $60 a share after land purchases in Montana and Wisconsin, citing Benjamin Segal, president of Winchester Capital Management.
- Universal Electronics(UEIC), the maker of remote controls for TVs and other appliances, is likely to expand in Asia after signing a contract with PCCW Ltd. Investment firm B. Riley’s Michael Coady said the company, which is a client, may see its stock increase 31% within a year.

Night Trading
Asian Indices are unch. to +.75% on average.
S&P 500 futures -.11%.
NASDAQ 100 futures -.21%.

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Economic Releases
8:30 am EST
- Personal Income for August is estimated to rise .4% versus a .5% gain in July.
- Personal Spending for August is estimated to rise .4% versus a .4% increase in July.
- The PCE Core for August is estimated to rise .1% versus a .1% gain in July.

9:45 am EST
-The Chicago Purchasing Manager Index for September is estimated to fall to 53.0 versus 53.8 in August.

10:00 am EST
- Construction Spending for August is estimated to fall .3% versus a .4% decline in July.
- Final Univ. of Mich. Consumer Confidence for September is estimated at 84.0 versus a prior estimate of 83.8.

Other Potential Market Movers
- The Fed’s Lockhart speaking, Fed’s Yellen speaking, Fed’s Poole speaking, Fed’s Mishkin speaking, NAPM-Milwaukee, (PRX) analyst meeting and JPMorgan Federal IT Services Forum could also impact trading today.

BOTTOM LINE: Asian indices are higher, boosted by commodity and technology stocks 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 Higher, Led by Technology and Commodity Shares

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Stocks Slightly Higher into Final Hour, Building on Recent Gains

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my 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 positive today as the advance/decline line is higher, sector performance is positive and volume is below average. The market continues to mostly ignore negative news and reward positive news, which should worry the many "crash-callers." Nasdaq reported recently that short interest on the exchange from mid-August through mid-September fell 7.4%, from 8.99 billion shares to 8.32 billion shares. However, as on the NYSE, over the last seven months, Nasdaq short interest has rocketed 18.2%, the largest seven-month percentage gain since at least 1991, according to Bloomberg. Here are the 25 Nasdaq stocks with the largest percentage increase in their short interest relative to their float from mid-August through mid-September:

1. Global Crossing (GLBC, +34.9%)
2. Lululemon Athletica (LULU, +18.9%)
3. Triad Guaranty (TGIC, +17.5%)
4. Superconductor Technologies (SCON, +12.4%)
5. Infinity Property and Casualty (IPCC, +11.5%)
6. Take-Two Interactive Software (TTWO, +9.1%)
7. Fuel-Tech (FTEK, +9.0%)
8. Bankrate (RATE, +9.0%)
9. Crocs (CROX, +8.6%)
10. Horsehead Holding (ZINC, +8.4%)
11. NutriSystem (NTRI, +8.3%)
12. Conns (CONN, +7.5%)
13. Tuesday Morning (TUES, +5.7%)
14. Corcept Therapeutics (CORT, +5.7%)
15. RF Micro Devices (RFMD, +5.5%)
16. Vineyard National Bancorp (VNBC, +5.4%)
17. Hoku Scientific (HOKU, +5.4%)
18. Theravance (THRX, +5.3%)
19. Synchronoss Technologies (SNCR, +5.0%)
20. Vermillion (VRML, +5.0%)
21. Silverstar Holdings (SSTR, +4.9%)
22. Atmel (ATML, +4.8%)
23. California Coastal Communities (CALC, +4.7%)
24. Salix Pharmaceuticals (SLXP, +4.5%)
25. True Religion Apparel (TRLG, +4.4%)

The S&P 500 also reported short interest data. Only two industries reported an increase in short interest, materials (+6.8%) and consumer discretionary (+0.3%) Here are the 25 S&P 500 stocks with the largest percentage increase in short interest relative to their float from mid-August through mid-September:

1. Jones Apparel (JNY, +18.5%)
2. Rohm & Haas (ROH, +11.6%)
3. W.W. Grainger (GWW, +7.4%)
4. Parker-Hannifin (PH, +3.9%)
5. Archstone-Smith Trust (ASN, +3.8%)
6. Marsh & McLennan (MMC, +3.8%)
7. Dillard's (DDS, +3.6%)
8. UST Incorporated (UST, +3.4%)
9 Bear Stearns (BSC, +3.4%)
10. MBIA (MBI, +3.4%)
11. DR Horton (DHI, +3.1%)
12. Verisign (VRSN, +2.8%)
13. Network Appliance (NTAP, +2.7%)
14. Ryder System (R, +2.4%)
15. Clorox (CLX, +2.2%)
16. Black & Decker (BDK, +2.1%)
17. Ambac Financial Group (ABK, +2.0%)
18. Big Lots (BIG, +1.9%)
19. RadioShack (RSH, +1.9%)
20. Sears Holdings (SHLD, +1.8%)
21. Family Dollar Stores (FDO, +1.6%)
22. Centurytel (CTL, +1.5%)
23. Masco (MAS, +1.3%)
24. Harrah's Entertainment (HET, +1.3%)
25. Circuit City (CC, +1.3%)

I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, lower long-term rates and investment manager performance anxiety.

Today's Headlines

Bloomberg:
- The decline in the US commercial paper market slowed last week, after the Fed cut rates.
- General Electric(GE) CEO Immelt said the global economy will weather a US housing recession and a tightening of the credit markets, and will record growth in 2008 and 2009.
- Crude oil is rising for a second day in NY after supplies at the delivery point for the US benchmark grade fell and speculators raised bets on a dollar decline.
- Democratic presidential candidates, already criticized by Republicans for moving too far toward a government-run health system, are being urged by advocacy groups and lawmakers to go the rest of the way. With backing from labor unions, 83 Democrats in the US House are sponsoring a measure to create a national health plan, abolish private insurers, make all hospitals nonprofit and redeploy 500,000 insurance workers, supporters said today.

Wall Street Journal:
- The Bush administration will announce a series of administrative moves to reduce air-traffic congestion and flight cancellations, particularly in the heavily clogged Northeast.
- Two new groups of bidders have emerged as Wendy’s Intl.(WEN) prepares to move into the second round of its sale process.

The Street.com:
- AT&T(T) is offering $55 a share to purchase satellite-tv provider EchoStar Communications(DISH). EchoStar is holding out for $65 per share, according to TheStreet.com.

Reuters:
- Intel Corp.(INTC) Chairman said the microchip maker is regaining market share against AMD(AMD) and its performance is looking “pretty good.”

2Q GDP Healthy, Inflation Below-Average, Initial Jobless Claims Fall, New Home Sale Decline

- Final 2Q GDP rose 3.8% versus estimates of a 3.8% gain and a prior estimate of a 4.0% increase.

- Final 2Q Personal Consumption rose 1.4% versus estimates of a 1.4% increase and a prior estimate of a 1.4% gain.

- Final 2Q GDP Price Index rose 2.6% versus estimates of a 2.7% gain and a prior estimate of a 2.7% gain.

- Final 2Q PCE Core rose 1.4% versus estimates of a 1.3% gain and prior estimates of a 1.3% increase.

- Initial Jobless Claims fell to 298K versus estimates of 316K and 313K the prior week.

- Continuing Claims rose to 2551K versus estimates of 2550K and 2540K prior.

- New Home Sales for August fell to 795K versus estimates of 825K and 867K in July.

BOTTOM LINE: The US economy grew in the second quarter at the fastest pace in more than a year, Bloomberg reported. The Fed’s preferred inflation gauge, the core pce, rose at a 1.4% annual rate in the second quarter and was up 2% year-over-year. Americans’ wages are rising at just about twice this rate. The smaller trade deficit during 2Q added 1.3 percentage points to growth, the most since 1996. Residential home construction fell at a 12% annual pace last quarter and subtracted .6 percentage points from growth. However, non-residential construction jumped 26% last quarter, the most since 1981. I continue to believe US economic growth will come in modestly below trend this quarter and next, rising around 2-2.5%. Lower inflation, booming exports, inventory rebuilding and a resilient consumer should continue to more than offset the drag from housing.

The number of US workers filing first-time claims for unemployment benefits unexpectedly fell to a four-month low, Bloomberg said. The four-week moving-average of claims dropped 3.1% to 311,500 from 321,250. “Labor market conditions overall are not deteriorating and remain pretty steady,” said Julia Coronado, senior US economist at Barclays Capital. The unemployment rate among those eligible to collect jobless benefits, which tracks the US unemployment rate, held steady at a historically low 1.9%. I continue to believe the job market will remain healthy over the intermediate-term without generating significant unit labor cost increases.

Sales of new homes in the US dropped more than forecast in August as the credit turmoil peaked, Bloomberg reported. The inventory of unsold homes rose to 8.2 months’ worth at the current sales pace. Sales fell 21% in the West and 15% in the South. However, sales soared 42% in the Northeast and jumped 21% in the Midwest. I still think home sales are in the process of stabilizing at lower, but relatively high by historic standards, levels. I expect home sales to bounce back a bit over the next couple of months. Home construction will remain weak over the intermediate-term as homebuilders pare down inventories.