Today's Headlines

Bloomberg:
- Nations such as Germany, Japan and India should unite with the US in Iraq by providing services such as border patrols or security training because the country has become central to preventing future terrorist attacks, Abraham Sofaer, a senior fellow at the Hoover Institution, said.
- ASML Holding NV, Europe’s largest maker of equipment used to make semiconductors, said second-quarter profit increased 72% as it sold more expensive machines used to make chips for mobile phones and consumer electronics.
- Tropical Storm Emily today moved toward the Windward Islands in the Caribbean Sea with maximum sustained winds of almost 60 mph and may intensify to hurricane strength.
- The US dollar rose against the euro, snapping a six-day losing streak, after a government report showed the US trade deficit in May unexpectedly narrowed.
- Former WorldCom Chairman Ebbers was sentenced to 25 years in prison for orchestrating the largest accounting fraud in US history, an $11 billion scheme that drove his company into bankruptcy.
- Crude oil is falling after a US government report showed stockpiles of distillates, which include heating oil and diesel fuel, rose more than analysts predicted.
- The Bush administration cut its estimate for this year’s budget deficit to $333 billion form a forecast of $427 billion in February because job and income growth is boosting tax receipts faster than expected.

Wall Street Journal:
- The US economy will grow 3.4% this year, inflation will remain low, and employment will increase at its current rate, citing a forecast by Ben Bernanke, Alan Greenspan’s likely replacement.

NY Times:
- Former US Secretary of State Colin Powell is joining Kleiner Perkins Caufield, the venture capital firm that financed Amazon.com, as a part-time partner.
- Publicly financed and privately run charter schools have spread across the US, with nearly 1 million students in 40 states enrolled in 3,300 schools.

NY Post:
- Sirius Satellite Radio may bid for Walt Disney’s radio station and network unit.

Star Ledger:
- New Jersey towns in districts controlled by Democrats received 93% of the state’s Homeland Security equipment grants over the past three years.

Reuters:
- Global oil demand in 2005 is proving slower than expected because of lower-than-forecast demand growth rates in China and the US, the International Energy Agency said.

Financial Times Deutschland:
- Hedge funds may adopt a set of rules for self-regulation, pre-empting possible tighter controls by governments concerned at their investment practices, citing the AIMA fund association.

Trade Deficit Improves, Import Prices Muted, Distillate Inventories Rise

- The Trade Deficit for May fell to -$55.3B versus estimates of -$57.0B and -$56.9B in April.
- The Import Price Index for June rose 1.0% versus estimates of a 1.0% increase and a 1.0% decline in May.
- Summary of Weekly Petroleum Data for the Week Ending July 8, 2005.
- The EIA reported crude inventories fell 3.9M barrels versus estimates of a 2.8M barrel decline. Gasoline inventories fell 2.6M barrels versus estimates of a 1.0M barrel decline. Distillate inventories rose 3.2M barrels versus estimates of a 2.0M barrel build.

BOTTOM LINE: The US trade deficit unexpectedly narrowed in May as imports of oil, other industrial materials and capital goods fell while exports hit an all-time record. The deficit with China widened to $15.8 billion, which is 29% of the entire US deficit. The numbers for April and May point to a narrower deficit in the second quarter, which should help add to 2Q GDP growth for the first time in 2 years.

Prices of imported goods other than petroleum declined .4% in June, the most in more than two years. This suggests US companies will struggle to raise prices due to foreign competition.

The continuing build in distillate inventories bodes well for my expectation of a substantial decline in crude prices before year-end.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Janet Yellen, president of the San Francisco Federal Reserve Bank, said in an interview with International Economy magazine that "it makes sense" for central bankers to keep lifting interest rates as long as the economy continues to grow and inflation stays stable.
- CNOOC's $18.5 billion bid for Unocal is an "ominous" move by China to dominate energy resources for the benefit of its economy and military, Frank Gaffney of the Center for Security Policy plans to tell Congress.
- Australia will send 150 troops to Afghanistan for 12 months as violence increased ahead of elections in September, Prime Minister John Howard said.
- Speculation Plays a Major Role in Higher Oil Prices: John Berry

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on MDT.
- Reiterated Underperform on NFS and DE.

Night Trading
Asian Indices are -.25% to +.25% on average.
S&P 500 indicated -.05%.
NASDAQ 100 indicated -.03%.

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Earnings of Note
Company/EPS Estimate
ABT/.57
AMD/-.05
AAPL/.31
BBT/.75
FAST/.57
GCI/1.37
HDI/.79
MOGN/.17
WWW/.21

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Economic Releases
8:30 am EST
- The Trade Deficit for May is estimated at -$57.0 billion versus -$57 billion in April.
- The Import Price Index for June is estimated to rise 1.0% versus a 1.3% decline in May.

2:00 pm EST
- The Monthly Budget Statement for June is estimated to rise to $23.0 billion versus $19.1 billion in May.

BOTTOM LINE: Asian indices are mostly higher. I expect US equities to again open mixed and consolidate recent gains throughout the day. The Portfolio is 100% net long heading into the day.

Stocks Finish Mostly Higher, Consolidating Recent Gains

Indices
S&P 500 1,222.21 +.23%
DJIA 10,513.89 -.06%
NASDAQ 2,143.15 +.36%
Russell 2000 670.79 -.14%
DJ Wilshire 5000 12,202.97 +.21%
S&P Barra Growth 584.58 +.30%
S&P Barra Value 633.36 +.16%
Morgan Stanley Consumer 578.56 +.08%
Morgan Stanley Cyclical 736.98 -.20%
Morgan Stanley Technology 494.93 +.73%
Transports 3,596.99 -.72%
Utilities 396.36 +.50%
Put/Call .77 -2.53%
NYSE Arms .84 +17.54%
Volatility(VIX) 10.95 -2.93%
ISE Sentiment 191.00 +6.70%
US Dollar 88.35 -1.24%
CRB 311.68 +.90%

Futures Spot Prices
Crude Oil 60.73 +3.07%
Unleaded Gasoline 178.00 +2.77%
Natural Gas 7.84 +4.60%
Heating Oil 175.10 +4.11%
Gold 427.60 +.30%
Base Metals 123.73 -.52%
Copper 153.90 -1.41%
10-year US Treasury Yield 4.14 +1.19%

Leading Sectors
Networking +2.13%
Oil Tankers +1.99%
Oil Service +1.52%

Lagging Sectors
Broadcasting -.99%
Hospitals -1.22%
Airlines -1.90%

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Afternoon Recommendations
Goldman Sachs:
- None of note

Afternoon/Evening Headlines
Bloomberg:
- US Treasuries may benefit as the government reduces its borrowings amid a narrower budget deficit, according to Tony Crescenzi, chief bond market strategist at Miller Tabak.
- Police found explosives in a car parked near a railway station in the town of Luton north of London, citing the British Press Assoc.
- US Treasuries fell, with the 10-year note falling the most in a week, as economists increased their growth forecasts, reinforcing expectations the Federal Reserve will keep raising its interest-rate target.
- Oil prices rose for the first session in four on worries that hurricanes would cut supply.

AFP:
- Iranian negotiators said the country will resume uranium enrichment and reject any European Union plan that doesn’t recognize Iran’s right to carry out nuclear activity.

BOTTOM LINE: The Portfolio finished slightly higher today on gains in my Retail and Networking longs. I took profits in an existing long in the afternoon and added NOK long, thus leaving the Portfolio 100% net long. I am using a $17 stop-loss on this position. The tone of the market was slightly positive today as the advance/decline line finished modestly higher, sector performance was mixed and volume was below average. Measures of investor anxiety were mostly lower into the close. Overall, today’s market action was positive. Here is a summary of Platts' Energy Inventory Estimates for tomorrow:
• Crude Stocks: -3.5 million barrels
• Gasoline Stocks: -950,000 barrels
• Distillate Stocks: +2.5 million barrels
• Refinery Utilization: -1.5% to 96.6%.
I expect traders to continue to focus on the distillate number as the perception that 4Q demand will exceed supply persists.

Stocks Slightly Higher Mid-day, Led by Tech and Energy

Indices
S&P 500 1,224.25 +.39%
DJIA 10,536.30 +.16%
NASDAQ 2,146.71 +.53%
Russell 2000 672.90 +.17%
DJ Wilshire 5000 12,221.31 +.36%
S&P Barra Growth 585.66 +.49%
S&P Barra Value 634.20 +.29%
Morgan Stanley Consumer 579.40 +.23%
Morgan Stanley Cyclical 739.11 +.08%
Morgan Stanley Technology 496.05 +.95%
Transports 3,599.80 -.65%
Utilities 396.89 +.64%
Put/Call .86 +8.86%
NYSE Arms .70 -1.51%
Volatility(VIX) 11.16 -.89%
ISE Sentiment 179.00 unch.
US Dollar 88.40 -1.18%
CRB 311.70 +.91%

Futures Spot Prices
Crude Oil 60.70 +3.02%
Unleaded Gasoline 177.90 +2.71%
Natural Gas 7.93 +5.80%
Heating Oil 175.10 +4.11%
Gold 427.10 +.19%
Base Metals 123.73 -.52%
Copper 153.90 -1.41%
10-year US Treasury Yield 4.12% +.86%

Leading Sectors
Networking +2.42%
Oil Service +2.21%
Software +1.23%

Lagging Sectors
Broadcasting -.85%
Hospitals -1.20%
Airlines -2.43%

BOTTOM LINE: The Portfolio is slightly higher mid-day on gains in my Retail, Semiconductor and Networking longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is slightly positive as the advance/decline line is modestly positive, sector performance is mixed and volume is below average. Measures of investor anxiety are mostly higher. Today’s overall market action is positive considering the rise in energy prices and recent gains. The Johnson Redbook Same-store-sales Index rose 4.2% year-over-year last week vs. a 4.4% rise the prior week. This is the strongest back-to-back weekly performance since early July 2004. This is also up from a 1.5% gain in late April and the tenth week in a row the index has exceeded 3%. The Morgan Stanley Retail Index has risen 14.1% this year and is up 30.4% over the last 12 months. The S&P 500 has risen 1.5% and 11.4% over the same time periods. I expect US stocks to trade mixed-to-higher into the close on short-covering and bargain hunting.