Unemployment Falls to Lowest Level Since 9/11 Attacks, Inventories Rise Slightly

- The Unemployment Rate for June fell to 5.0% versus estimates of 5.1% and 5.1% in May.
- Average Hourly Earnings for June rose .2% versus estimates of a .2% increase and a .2% gain in May.
- The Change in Non-farm Payrolls for June rose to 146K versus estimates of 200K and an upwardly revised 104K in May.
- The Change in Manufacturing Payrolls for June fell to -24K versus estimates of -5K and -6K in May.
- Wholesale Inventories for May rose .1% versus estimates of a .5% increase and a .8% gain in April.

BOTTOM LINE: US employers added 146,000 workers in June and the unemployment rate fell to the best level since the 9/11 terrorist attacks in 2001. Wage gains are helping boost consumer spending. Wages and Salaries were up 7% in May from the same time last year, more than twice the rate of inflation. Retailers from Wal-Mart to Nordstrom posted their biggest sales gain in 13 months in June even with high gas prices, according to the International Council of Shopping Centers. I continue to believe job gains will remain modest, slowly lowering the unemployment rate while keeping unit labor costs in check.

Rising imports in three of the first four months of the year spurred warehouse construction and suggest inventory expansion continues to support economic growth. The amount of time wholesale goods went unsold, known as the inventory-to-sales ratio, was unchanged from April at 1.18 months. I expect inventory building to increase later in the year as companies gain confidence in a continuation of the current economic expansion and automakers inventories stabilize.

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Friday Watch

Late-Night Headlines
Bloomberg:
- The California Public Employees' Retirement System and the California State Teachers' Retirement System, the largest and third-largest US pension funds, should oppose CNOOC's bid for Unocal, state controller Steve Westly said.
- LG.Philips LCD, the world's largest maker of liquid-crystal displays, and its two closest rivals may post second-quarter profits as rising demand helped ease oversupply and bolster screen prices.
- The US dollar traded near a one-year high against the yen in Asia on expectations a report will show US employers hired more than twice as many workers in June as in May.
- Crude oil is falling for a second day after the attack in London yesterday raised concern terrorism will deter travel, slowing jet-fuel sales, and after a report showed US supplies of distillates soared.
- Deloitte & Touche LLP, the largest US accounting firm, is being investigated by federal regulators over a 2003 audit of Navistar International, according to a document authorizing the probe.

China Daily:
- China's coal stockpiles reached a record 19.7 million tons by June 21, almost double from a year earlier.

The Standard:
- UPS plans to invest $500 million in China in the next two years.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on ACN.

Business Week:
- WR Berkley(BER) shares will likely rise as the company shifts its focus from high-risk property insurance to more profitable polices.
- Polycom(PLCM) may benefit as videoconferencing moves to the Internet and the number of home users rise.

Night Trading
Asian Indices are -.25% to +.25% on average.
S&P 500 indicated +.18%.
NASDAQ 100 indicated +.23%.

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Company/EPS Estimate
STAR/.32
RGS/.64
SGR/.22

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Economic Releases
8:30 am EST:
- The Unemployment Rate for June is estimated at 5.1% versus 5.1% in May.
- Average Hourly Earnings for June are estimated to rise .2% versus a .2% increase in May.
- The Change in Non-farm Payrolls for June is estimated at 200K versus 78K in May.
- The Change in Manufacturing Payrolls for June is estimated at -5K versus -7K in May.

10:00 am EST:
- Wholesale Inventories for May are estimated to rise .5% versus a .8% increase in April.

3:00 pm EST:
- Consumer Credit for May is estimated to rise to $4.1B versus $1.3B in April.

BOTTOM LINE: Asian indices are mostly lower, led down by energy stocks in the region. I expect US equities to open modestly higher and weaken slightly later in the day on rising apprehension ahead of the weekend. The Portfolio is 75% net long heading into the day.

Stocks Display Extraordinary Resiliency After London Bombings

Indices
S&P 500 1,197.87 +.25%
DJIA 10,302.29 +.31%
NASDAQ 2,075.66 +.34%
Russell 2000 649.30 +.16%
DJ Wilshire 5000 11,947.20 +.26%
S&P Barra Growth 570.85 +.24%
S&P Barra Value 622.94 +.25%
Morgan Stanley Consumer 565.87 -.30%
Morgan Stanley Cyclical 718.63 +.27%
Morgan Stanley Technology 476.24 +.10%
Transports 3,519.27 -.06%
Utilities 386.59 +.89%
Put/Call 1.04 +8.33%
NYSE Arms 1.18 -21.36%
Volatility(VIX) 12.49 +1.79%
ISE Sentiment 151.00 -34.91%
US Dollar 90.28 -.11%
CRB 312.01 -.42%

Futures Spot Prices
Crude Oil 60.43 -1.39%
Unleaded Gasoline 180.10 +.62%
Natural Gas 7.37 -4.07%
Heating Oil 176.00 -1.94%
Gold 425.40 +.21%
Base Metals 120.60 -.43%
Copper 153.30 +.20%
10-year US Treasury Yield 4.06 -.19%

Leading Sectors
Homebuilders +2.14%
Biotech +1.51%
Steel +1.34%

Lagging Sectors
Airlines -.45%
Tobacco -.99%
Broadcasting -1.79%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on CEM.

Afternoon/Evening Headlines
Bloomberg:
- Terrorist attacks in London may deepen an economic slowdown in the UK, the world’s fourth-biggest economy, crimping global growth prospects further.
- GM’s debt and that of its finance subsidiary is under review and may be downgraded to non-investment grade by Moody’s Investors Service, the rating company said today.
- Charles Schwab said it has “no interest” in being acquired, dousing a rally in its shares fueled by takeover speculation.
- Residents of southern Florida began bracing for their first hurricane of the season as a strengthening Dennis was upgraded to a Category 3 hurricane with winds reaching 115 mph.

Financial Times:
- Iran and Iraq will start military cooperation as part of a “new chapter” in their relations, citing the countries defense ministers.

London-based Times:
- The Bank of England may hold an emergency meeting within days to reconsider the level of its interest rate in the wake of the blasts in London, citing the Centre for Economics and Business Research.

BOTTOM LINE: The Portfolio finished higher today on gains in my Retail, Internet and Homebuilding longs. I did not trade in the afternoon, thus leaving the Portfolio 75% net long. The tone of the market was slightly positive today as the advance/decline line finished about even at session highs, most sectors advanced and volume was around average. Measures of investor anxiety were mostly higher into the close. Overall, today’s market action was positive. The market displayed exceptional resiliency today. The major indices and breadth are at session highs even with the late-day surge in oil prices. I am becoming more confident that another significant move higher in equities will occur before year end. I expect non-farm payrolls to come in slightly below estimates of 200,000 tomorrow. Consumer credit is likely to exceed expectations of $4.1 billion. Stocks are likely to trade mixed to weaker tomorrow as apprehension rises ahead of the weekend.

Stocks Modestly Lower Mid-day on Terrorism Fears

Indices
S&P 500 1,192.72 -.19%
DJIA 10,257.86 -.13%
NASDAQ 2,070.10 +.07%
Russell 2000 648.19 -.01%
DJ Wilshire 5000 11,893.86 -.17%
S&P Barra Growth 568.55 -.17%
S&P Barra Value 619.81 -.25%
Morgan Stanley Consumer 565.14 -.43%
Morgan Stanley Cyclical 713.65 -.42%
Morgan Stanley Technology 475.49 -.06%
Transports 3,500.67 -.58%
Utilities 384.15 +.26%
Put/Call 1.18 +22.92%
NYSE Arms 1.41 -6.66%
Volatility(VIX) 12.98 +5.87%
ISE Sentiment 153.00 -34.05%
US Dollar 90.30 -.09%
CRB 312.57 +.90%

Futures Spot Prices
Crude Oil 59.40 -3.07%
Unleaded Gasoline 177.00 -1.11%
Natural Gas 7.28 -5.31%
Heating Oil 172.95 -3.72%
Gold 424.30 -.05%
Base Metals 120.60 -.43%
Copper 153.55 +.36%
10-year US Treasury Yield 4.03% -.86%

Leading Sectors
Homebuilders +1.95%
Biotech +1.15%
HMOs +.50%

Lagging Sectors
Airlines -.82%
Oil Service -.92%
Tobacco -1.04%

BOTTOM LINE: The Portfolio is higher mid-day on gains in my Internet, Retail and Homebuilding longs. I have not traded today, thus leaving the Portfolio 75% net long. The tone of the market is neutral as the advance/decline line is slightly lower, sector performance is mixed and volume is above average. Measures of investor anxiety are mostly higher. Today’s overall market action is positive considering the largest attacks on British soil since WWII. European economies, already stagnate, will likely move more quickly towards negative growth as a result of the attacks. This will further damp demand for commodities during the next few quarters. I expect US stocks to trade mixed-to-higher into the close on short-covering, bargain hunting and lower energy prices.

Today's Headlines

Bloomberg:
- Terrorists set off bombs in morning rush hour on London’s subway system and a bus, killing at least 33 people and injuring more than 345 others in the deadliest attack on the city since Word War II.
- Abu Musab al-Zarqawi’s al-Qaeda-linked cell said that it killed Egypt’s ambassador-designate to Iraq, who was kidnapped in Baghdad on July 2.
- US retailers from Wal-Mart Stores to Nordstrom posted better-than-expected sales gains in June as rising temperatures and increased hiring spurred purchases of air conditioners and warm-weather clothing.
- Omnicare, the biggest provider of drugs and pharmacy services to US nursing homes, agreed to buy NeighborCare for about $1.5 billion to expand its customer base and cut costs by increasing efficiency.
- The impact on the US stock market from terrorist attacks may not last long if historical trends are any guide, according to strategists Abby Joseph Cohen of Goldman Sachs and Tobias Levkovich of Smith Barney.
- The US Department of Homeland Security will raise the terror threat level for public transit systems while keeping the national threat level unchanged.
- Crude oil reached a record $62.10 a barrel in NY and then plunged as terrorist bombs that killed at least 33 people in London raised the possibility of an economic slowdown. It was the largest price swing in 14 years.

Wall Street Journal:
- A breakup of the European Monetary Union is now possible, following the French and Dutch voters’ rejection of the European Union constitution, Joachim Fels, chief global fixed-income economist at Morgan Stanley in London wrote.
- US amputees, aided by advances in medical treatment, are requesting to return to combat in Iraq.
- Mitsubishi Motors, Ford Motor’s Volvo unit and DaimlerChrysler’s Mercedes-Benz and other automakers are ending their free-maintenance programs in the US to cut costs.
- Countries such as Australia, South Africa and Colombia are struggling to expand ports, rail yards and airports to meet demand for coal and other commodities, creating a bottleneck that keeps prices high.

NY Times:
- Since McDonald’s was sued in 2002 for allegedly making two NY teenagers fat, 20 US states adopted laws preventing lawsuits claiming obesity-related personal injury, while laws in 11 states are pending.

Financial Times:
- Al-Qaeda said it carried out attacks on London today in a statement posted on an Islamist Web site.