2Q GDP Accelerates, Inflation Decelerates, Jobless Claims Rise, Manufacturing Unexpectedly Expands

- Advance 2Q GDP rose 1.9% versus estimates of a 2.3% gain and a downwardly revised .9% increase in 1Q.

- Advance 2Q Personal Consumption rose 1.5% versus estimates of a 1.7% increase and a downwardly revised .9% gain in 1Q.

- Advance 2Q GDP Price Index rose 1.1% versus estimates of a 2.4% gain and a downwardly revised 2.6% increase in 1Q.

- Advance 2Q Core PCE rose 2.1% versus estimates of a 2.0% increase and a 2.3% gain in 1Q.

- The 2Q Employment Cost Index rose .7% versus estimates of a .7% gain and a .7% increase in 1Q.

- Initial Jobless Claims for this week rose to 448K versus estimates of 393K and 404K the prior week.

- Chicago Purchasing Manager for July rose to 50.8 versus estimates of 49.0 and 49.6 in June.

BOTTOM LINE: The US economy accelerated during the second quarter as the effects of the federal tax rebates took hold, Bloomberg reported. The trade deficit shrank to a $395.2 billion annual pace during the quarter, adding 2.4 percentage points to growth, the most since 1980. Residential construction fell at a 15.6% annual rate after dropping 25.1% in the first quarter. The decline subtracted .6 percentage point from growth, the least in more than two years. The GDP Price Index rose 1.1% during 2Q, the smallest increase in 10 years and down from a 2.6% rise in 1Q. The Core PCE, the Fed’s preferred inflation gauge, decelerated to 2.1%, which is close to the Fed’s target of 1-2%. According to Intrade.com, the percentage chance that the US slips into recession this year is 19.5%, down from a 79% chance in Mid-March. I expect 3Q GDP to come in around 1.5% and inflation to decelerate further on the fall in commodities.

The number of Americans filing first-time claims for unemployment benefits unexpectedly rose last week, Bloomberg reported. The four-week moving average of claims rose to 393,000 from 382,000 the prior week. The unemployment rate among those eligible for benefits, which tracks the US unemployment rate, rose to 2.5% from 2.3% the prior week. 13 states and territories reported an increase in new claims, while 40 reported a decline. I expect jobless claims to decelerate next week and still expect non-farm payrolls, released tomorrow, to come in modestly better-than-estimates of -75K.

A measure of US business activity unexpectedly rose in July, led by a gain in orders, and is now indicating expansion, Bloomberg said. The New Orders component rose to 53.5 from 52.0 in June. The Order Backlogs component rose to 45.7 from 42.3. The Employment component fell to 45.9 versus 46.7 the prior month. The Inventories component rose to 54.9 from 50.5. The Prices Paid component rose to 90.7 versus 85.5 the prior month. I suspect July will mark the high point for the prices paid index. The CRB commodities index, the main source of inflation fears, has declined 12.2% since July 2. I expect manufacturing gauges to continue to indicate mild expansion next month. After an initial sell-off, the US Dollar Index is just slightly lower on today’s reports and is at session highs. The 10-year yield is falling 9 basis points. The BankRate.com avg. 30-year fixed mortgage rate is 6.35%, down 16 basis points in a week.

Bull Radar

Style Outperformer:

Small-cap Growth (+.45%)

Sector Outperformers:

Biotech (+4.12%), Airlines (+3.69%) and Papers (+3.49%)

Stocks Rising on Unusual Volume:

CADX, IMCL, FORM, COHR, TYC, SGP, AZN, RIMM, GRMN, TIN, DWSN, CGV, MRO, SWN, IMCL, DRIV, LHCG, ONXX, VISN, PDGI, TTEK, DXPE, ALXN, UTHR, SHPGY, PTRY, RCRC, GTIV, RNOW, LOOP, AMLN, CVC, MTZ, OCR, CRY, TWP and TRN

Stocks With Unusual Call Option Activity:

1) GGP 2) CDE 3) CVH 4) IP 5) IMCL

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Thursday Watch

Late-Night Headlines
Bloomberg:
- The cost of protecting against a default by bond insurers dropped for a second day on speculation that this week's deal between Security Capital Assurance Ltd. and Merrill Lynch & Co. to tear up $3.7 billion in guarantees will lead to more agreements. More tear-ups of credit-default swap contracts guaranteeing payments on mortgage-related securities would eliminate the need for banks such as Merrill to hedge their positions with contracts protecting against bond insurer defaults, Bank of America Corp. strategists led by Jeffrey Rosenberg wrote in a note to clients that was published today.
- Australia may be headed for a housing recession similar to those roiling the U.S. and U.K. The cause is a combination of rising default rates, the biggest drop in home prices in five years, the highest borrowing costs in a decade and slowing economic growth. Prices in the property market -- described by the International Monetary Fund in April as one of the world's most ``overvalued'' -- will fall 30 percent by 2010, according to Gerard Minack, senior economist at Morgan Stanley in Sydney. Prices dropped in all of Australia's major cities last month for the first time since just before the Great Depression.
- Australian retail sales fell by the most in six years in June as the highest borrowing costs since 1991 and rising gasoline prices prompted consumers to rein in spending. Sales dropped 1 percent from May, when they rose a revised 0.9 percent, the Bureau of Statistics said in Sydney today.
- Amanda Kurzendoerfer, an analyst at Summit Energy Services, says oil-supply data is ‘bearish’ for prices. (video)
- Platinum has tumbled 16 percent this month, partly because of slumping car sales, and is headed for the worst one-month plunge in 21 years.
- Asian currencies have yet to feel the full force of the “oil shock” and will decline even if the price of crude falls to $100 per barrel, Morgan Stanley says. Record fuel import costs have sent the current-account balances of South Korea, India and Thailand into deficit, posing “tremendous headwinds” for the economies, said Stephen Jen, chief currency economist at Morgan Stanley in London. The impact on inflation and consumer spending has been limited because of fuel subsidies that aren’t sustainable, he said. “The biggest shock to Asia is not the US housing crisis but the oil shock,” Jen said. Indonesia’s rupiah, the Philippine peso and India’s rupee will be the “first to go” as these countries’ governments are the least able to maintain subsidies.
- U.K. consumer confidence dropped to a record low in July, slipping below the level reached on the eve of the 1990 recession, as house prices slumped and inflation accelerated, GfK NOP said. An index of confidence, based on a survey of 2,001 people, fell 5 points to minus 39, the lowest since the data began in 1974, GfK said today in London. The gauge fell to 4 points below the result for March 1990.
- Visa Inc.(V), the world's largest credit-card company, said profit rose 41 percent on gains from U.S. debit-card purchases and faster growth overseas. The stock rose 2.5% in after-hours trading.
- First Solar Inc.(FSLR), the world's biggest maker of thin-film solar power modules, said second-quarter profit rose 57 percent on greater demand for its lighter, lower- cost technology. The stock jumped 6.8% in extended trading.
- Symantec Corp.(SYMC), the world's biggest maker of security software, said first-quarter profit almost doubled and gave a forecast that beat analysts' estimates as international customers added programs to store and protect data. The stock rose 3.7% in after-hours trading.
- Akamai Technologies Inc.(AKAM), the largest supplier of software and services to speed up the delivery of Web pages, dropped 17 percent in extended trading after cutting its full-year earnings forecast.
- THQ Inc.(THQI), the third-largest U.S. video-game publisher, reported a wider first-quarter loss as it spent more to develop games such as ``Saints Row 2,'' and lowered its annual sales and profit forecasts. The stock fell 10.6% in after-hours trading.
- Construction sites in Beijing, closed because of the Olympic Games, may remain shut for two months, curbing demand for steel in the world's biggest consumer, Shougang Corp. said. Beijing has shut factories and barred vehicles and the International Olympic Committee has warned it may postpone events should pollution levels put athletes at risk during the Aug. 8 to Aug. 24 games. ``Steel demand in Beijing is almost zero, transportation has also stopped,'' Wang Sujuan, an analyst at Mysteel, said in Beijing. ``Traders have gone home. Some producers have to build up their stockpiles.''

Wall Street Journal:
- Presidential rivals Barack Obama and John McCain both appear to be seizing the roles in which they have been cast: Sen. Obama as front-runner and Sen. McCain as underdog. The approach carries perils for both men.

MarketWatch.com:
- A bill that would put new limits on speculative trading in energy commodities failed to get the required two-third majority of votes to pass the House on Wednesday. The vote was 276 to 151. The Commodity Markets Transparency and Accountability Act would boost staffing at the Commodity Futures Trading Commission and require the agency to limit the positions of speculators in energy and agricultural commodities.

IBD:
- Software That Tests Airplane Wings Will Go For Gold In Beijing.

Forbes.com:
- Top Colleges For Getting Rich.
- Most Lucrative College Majors.
- Best Cities For Recent College Grads.

CNNMoney.com:
- Energy solutions: You decide. As Americans grapple with record oil and gas prices, politicians facing angry voters have offered up a variety of solutions. Vote here.

USA Today.com:
- Study: US has up to 50% more natural gas than once thought. The report says the U.S. has up to 50% more natural gas reserves than earlier projections because of higher-than-expected yields from 22 shale formations in 20 states. The industry says the findings should prod policymakers to provide incentives to wean the nation from $4 gasoline and move to compressed natural gas as a standard fuel in many cars and trucks. The U.S. has enough natural gas resources to last up to 118 years, or 2,247 trillion cubic feet (Tcf), says the study by Navigant Consulting for the American Clean Skies Foundation. That group is largely funded by natural gas companies.
- Thomson Reuters says earnings are down 17.9% so far in the second quarter. S&P 500 earnings would be up 7.8% if financials are taken out, Thomson says.

AP:
- Dozens of hedge funds, private equity groups and other investors have plunged into the beaten-down mortgage market in recent months, buying tens of thousands of distressed loans and foreclosed properties around the country. They hope to profit from the woes of banks and other investors holding mortgages that have plummeted in value as home values sink and defaults soar.
- How the housing bill signed into law Wednesday by President Bush affects homeowners:

Reuters:
- International Olympic Committee members agreed to allow China to block Web sites during the Beijing Games after promising the media that there would be unrestricted access. Web sites blocked in the main press center include Amnesty International, which this week said China failed to honor Olympic human rights pledges.
- Energy tycoon T. Boone Pickens said on Wednesday he is creating an "army" of business leaders and mainstream Americans to lobby for his plan to revamp U.S. energy policy in favor of wind power and natural gas over imported oil. Pickens, who made a fortune in the oil industry, now has a $10 billion wind farm under development.

Financial Times:
- For the first time in history, a crisis triggered by US housing finance problems is having global ramifications. Individual companies have drawn lessons from the crisis but common efforts to reform the financial system are the order of the day. The challenge is to extend individual reforms across the financial services industry.
- The Federal Reserve ramped up its liquidity support operations again on Wednesday in an effort to reduce money market strains and pre-empt the possibility of funding crises at the year-end or at other stress points. The US central bank said it would offer three-month cash loans to banks and create a new options auction facility. It also said it would give investment banks and other primary dealers extended access to emergency cash and loans of Treasury securities until January 30.
- Six of the US's independent over-the-counter brokers will on Thursday announce they are uniting to form an interdealer brokerage that will be a leading force in trading North American energy futures. The move comes as energy trading comes under intense pressure from Congress, where speculation and opaque markets have been blamed for high oil prices.

Telegraph:
- Foreign investors have become extremely wary of the Russian stock market after the Kremlin moved yet again to tighten its noose around the country's energy and mining sector, launching anti-trust probes against London-listed Evraz Holding and Raspadsky Coal. The move follows last week's assault on steel and coal giant Mechel for alleged overpricing of raw materials and using off-shore trading to cut its tax bill.

Kyodo News:
- Japan is likely to downgrade its assessment of the economy in a report next week, citing government officials. The world’s second-largest economy will probably be assessed as “worsening” in a report on the coincident index for June to be released on Aug. 6, as opposed to “possibly at a turning point” in May. Japan may already be in a recession, according to a separate report in the Nikkei newspaper based on a survey of 10 economists.

Late Buy/Sell Recommendations
Citigroup:
- Maintained Buy on (SYMC), target $24.
- Downgraded (TBL) to Sell, target $13.

Night Trading
Asian Indices are -.50% to +.25% on average.
S&P 500 futures -.16%.
NASDAQ 100 futures -.20%.

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Earnings of Note
Company/EPS Estimate
- (NMX)/.81
- (IRM)/.18
- (ADP)/.41
- (CEG)/1.05
- (MA)/2.02
- (D)/.51
- (XOM)/2.53
- (FPL)/.93
- (GT)/.59
- (IP)/.40
- (PH)/1.50
- (MRO)/1.5
- (EXPE)/.39
- (CVC)/.11
- (PTEN)/.50
- (CBS)/.52
- (AET)/.93
- (EK)/.15
- (MO)/.45
- (MOT)/-.03
- (BWA)/.76
- (K)/.81
- (CVS)/.60
- (APA)/4.05
- (CHK)/.88
- (CA)/.34
- (MFE)/.45
- (MEE)/.76
- (MNST)/.36
- (DLB)/.31
- (KLAC)/.57
- (MORN)/.49
- (GMCR)/.21
- (BCO)/.77
- (ZEUS)/1.96

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Advance 2Q GDP is estimated to rise 2.3% versus a 1.0% gain in 1Q.
- Advance 2Q Personal Consumption is estimated to rise 1.7% versus a 1.1% gain in 1Q.
- Advance 2Q GDP Price Index is estimated to rise 2.4% versus a 2.7% gain in 1Q.
- Advance 2Q Core PCE rose 2.0% versus a 2.3% gain in 1Q.
- The 2Q Employment Cost Index is estimated to rise .7% versus a .7% increase in 1Q.
- Initial Jobless Claims for this week are estimated to fall to 393K versus 406K the prior week.
- Continuing Claims are estimated to rise to 3150K versus 3107K prior.

9:45 am EST
- The Chicago Purchasing for July is estimated to fall to 49.0 versus 49.6 in June.

Other Potential Market Movers
- The weekly EIA natural gas inventory report and NAPM-Milwaukee report could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by automaker and industrial shares 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.

Stocks Finish at Session Highs, Boosted by Financial, Commodity, Construction and Semi Shares

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In Play

Stocks Mixed into Final Hour as Rising Oil Offsets Less Economic Pessimism

BOTTOM LINE: The Portfolio is about even into the final hour as gains in my Computer longs, Semi longs and Alternative Energy longs offset losses in my Internet longs and Commodity shorts. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is mixed as the advance/decline line is about even, sector performance is mixed and volume is about average. Investor anxiety is slightly above average. Today’s overall market action is mildly bullish. The VIX is rising .05% and is still above-average at 22.04. The ISE Sentiment Index is low at 110.0 and the total put/call is about average at .87. Finally, the NYSE Arms has been running slightly below average most of the day and is currently .79. The Euro Financial Sector Credit Default Swap Index is rising 2.65% today to 79.42 basis points. This index is up from a low of 52.66 on May 5^th, but down from 129.46 basis points on March 20^th. The North American Investment Grade Credit Default Swap Index is -2.15% today to 130.17 basis points. The TED spread is rising 1.12% to 1.10. Today’s action is more constructive taking into consideration yesterday’s advance and today’s $4.60 jump in oil. The fact that the financials etf(XLF), which has a negative -.95 correlation with oil, is maintaining recent gains is especially positive. Merrill(MER) is trading up another 2.4%. Half the financial newsletter writers are bearish, the most since 1995, which also bodes well for an extension of recent gains. The last time stock pessimism was this high was in January 1995, a month before the Dow Jones Industrial Average rose to 4,000 for the first time and began an advance of more than 100 percent over the next five years. The Citi eurozone economic surprise index is now -155.70 versus +29.40 in the US. I still think the US dollar has further upside over the short and intermediate-term. Nikkei futures indicate an +77 open in Japan and DAX futures indicate an +25 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, diminishing financial sector pessimism and less economic pessimism.