Wednesday Watch

Late-Night Headlines
Bloomberg:
- Nomura Holdings, Japan's largest securities firm, plans to expand its US investment banking business to win more fees in the world's biggest market after benefiting in Europe from a venture with Rothschild Group.
- President Bush selected John G. Roberts Jr., a Washington federal appeals court judge, to fill the vacancy on the US Supreme Court.
- China, producer of one-third of the world's steel, will force mills to merge and shut small, polluting furnaces to curb expansion of the industry and prevent a glut of the metal on world markets.
- China's economic growth unexpectedly picked up in the second quarter as exports surged and investment in power plants, coal mines and other fixed assets gathered pace.

NY Times:
- Forty-six people in California have been charged with lying to US officials to get their pilots licenses.

Financial Times:
- Japan and China's private equity investments fell in the first half of the year as regulations, tax policies, and increasing domestic competition affected foreign acquirers.

Guardian:
- The US and Europe are at the forefront of a "crazy" global airline industry which encourages governments to prop up failing carriers, citing British Airways Plc Chairman Martin Broughton.

Times of India:
- Starbucks Corp. may soon announce an Indian joint venture partner as part of a plan to start business locally.

China Times:
- China last week test-fired its M-9 short-range missile and is preparing its annual military exercise on and around the southeastern island of Dongshan adjacent to Taiwan.
- China's investment in coal extraction, power facilities and railways increased 81%, 37% and 48% respectively during the first half of the year from the first half.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on YHOO, XTO, BSX, WFC and CAKE.

Night Trading
Asian Indices are +.50% to +.75% on average.
S&P 500 indicated -.35%.
NASDAQ 100 indicated -.66%.

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Earnings of Note
Company/EPS Estimate
ALL/1.51
MO/1.33
AMR/.15
BK/.50
COF/1.75
CAL/.20
EK/.80
EBAY/.18
FFIV/.34
GD/1.62
GM/.03
GDW/1.15
HON/.50
JPM/.64
LRCX/.44
MACR/.21
PFE/.44
QCOM/.25
QLGC/.43
RYL/1.80
STJ/.36
UTX/.85
VRSN/.26
WYE/.70

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AMX 3-for-1

Economic Releases
10:00 am EST
- Greenspan Report on Economy & Policy

BOTTOM LINE: Asian indices are higher, led by commodity stocks in the region. I expect US equities to open lower, spurred by tech shares. However, stocks may rally late in the day on optimism for a stronger second half. The Portfolio is 100% net long heading into the day.

Stocks Finish Higher, Led by Tech, Cyclicals and Small-Caps

Indices
S&P 500 1,229.35 +.67%
DJIA 10,646.56 +.68%
NASDAQ 2,173.18 +1.32%
Russell 2000 666.86 +1.56%
DJ Wilshire 5000 12,261.46 +.78%
S&P Barra Growth 589.92 +.88%
S&P Barra Value 635.03 +.47%
Morgan Stanley Consumer 584.66 +.17%
Morgan Stanley Cyclical 753.03 +1.36%
Morgan Stanley Technology 505.48 +1.65%
Transports 3,636.96 +.11%
Utilities 393.78 +.45%
Put/Call .76 -26.21%
NYSE Arms 1.10 -17.18%
Volatility(VIX) 10.45 -2.97%
ISE Sentiment 164.00 +.61%
US Dollar 89.85 +.23%
CRB 304.79 -.70%

Futures Spot Prices
Crude Oil 57.64 +.56%
Unleaded Gasoline 168.10 +2.05%
Natural Gas 7.61 -.55%
Heating Oil 164.12 +.59%
Gold 420.20 unch.
Base Metals 122.83 -.28%
Copper 158.90 +.16%
10-year US Treasury Yield 4.18 -.98%

Leading Sectors
Oil Service +3.72%
Steel +3.71%
Papers +3.04%

Lagging Sectors
Drugs -.20%
Oil Tankers -.72%
HMOs -1.20%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on DISH, AMGN, GILD, FDC and USB.
- Reiterated Underperform on LU and UIS.
- Downgraded CSC and EDS to Underperform.

Afternoon/Evening Headlines
Bloomberg:
- Google will open a research and development center in China and recruited the founder of Microsoft’s Chinese lab, Kai-Fu Lee, as president of its Chinese unit.
- Hurricane Emily regained strength after pounding the Yucatan Peninsula and headed across the Gulf of Mexico toward northeast Mexico, prompting residents to brace for heavy wind and rain.
- President Bush has decided on his nominee to succeed retiring US Supreme Court Justice Sandra Day O’Connor and will announce his choice in a 9pm televised White House speech. According to TradeSports.com, Judge Edith Jones is the frontrunner with a 39% chance of being chosen.

BOTTOM LINE: The Portfolio finished substantially higher today on gains in my Internet, Networking, Semi and Retail longs. I did not trade in the afternoon, thus leaving the Portfolio 100% net long. The tone of the market was positive today as the advance/decline line finished higher, most sectors rose and volume was about average. Measures of investor anxiety were lower into the close. Overall, today’s market action was positive. I expect stocks are likely nearing a consolidation point. Greenspan’s testimony tomorrow could provide the catalyst.

Stocks Strong Mid-day, Boosted by Earnings Optimism in Tech

Indices
S&P 500 1,226.34 +.44%
DJIA 10,629.68 +.52%
NASDAQ 2,168.02 +1.09%
Russell 2000 666.99 +1.28%
DJ Wilshire 5000 12,235.16 +.57%
S&P Barra Growth 588.52 +.64%
S&P Barra Value 634.02 +.31%
Morgan Stanley Consumer 584.54 +.15%
Morgan Stanley Cyclical 752.18 +1.25%
Morgan Stanley Technology 504.36 +1.43%
Transports 3,637.05 +.12%
Utilities 393.49 +.37%
Put/Call .78 -24.27%
NYSE Arms 1.04 -21.60%
Volatility(VIX) 10.50 -2.51%
ISE Sentiment 193.00 +18.40%
US Dollar 89.89 +.28%
CRB 303.74 -1.04%

Futures Spot Prices
Crude Oil 57.05 -.47%
Unleaded Gasoline 165.10 +.22%
Natural Gas 7.54 -1.46%
Heating Oil 163.10 -.04%
Gold 420.40 -.14%
Base Metals 122.83 -.28%
Copper 158.65 +1.28%
10-year US Treasury Yield 4.19% -.74%

Leading Sectors
Papers +4.62%
Steel +3.49%
Oil Service +2.08%

Lagging Sectors
Drugs -.37%
Oil Tankers -.74%
HMOs -1.61%

BOTTOM LINE: The Portfolio is substantially higher mid-day on gains in my Internet, Semiconductor, Networking and Homebuilding longs. I exited my SPY short this morning and added AAPL long, thus leaving the Portfolio 100% net long. I am using a $40 stop-loss on this new position. The tone of the market is positive as the advance/decline line is higher, most sectors are rising and volume is about average. Measures of investor anxiety are lower. Today’s overall market action is positive considering the market’s overbought state and the outperformance by Tech stocks. The Johnson Redbook Same-store-sales Index rose 4.2% year-over-year last week vs. a 4.2% rise the prior week. This is the first time weekly sales have exceeded 4.0% for three consecutive weeks since June 2004. This week’s gain is also up from a 1.5% increase in late April and the eleventh week in a row the index has exceeded 3%. I expect stocks to trade mixed-to-higher into the afternoon on short-covering and a decline in long-term rates.

Today's Headlines

Bloomberg:
- The US dollar rose the most in a week against the euro and climbed to the highest in more than a year versus the yen on speculation rising interest rates will attract foreign investors to US assets.

Wall Street Journal:
- The world’s steel industry has quickly turned from supply shortages to overproduction, leading to a flood of mergers and acquisitions.
- FCC chairman Kevin Martin says his top goal is to broaden access to high-speed Internet services.
- The US Congress may extend daylight-savings time for two months, starting it earlier in the year, and ending it later in order to save energy.
- Starbucks became a competitor in the music business since it started selling selected music.
- Trading of convertible bonds has gone through its worst six-month spell in 15 years.

NY Times:
- President Bush is moving faster than expected on his selection process for a Supreme Court nominee and may make an announcement “within the next few days.”
- Fruit and vegetables will have their identifying details tattooed on with lasers, eliminating the need for stickers.

Washington Post:
- The Bush administration wants to introduce performance-based compensation for the 1.8 million civilian federal employees by 2010.

NY Post:
- McDonald’s will introduce three premium chicken sandwiches today, reflecting a leaner American diet.
- Federated’s Macy’s is expanding the American Rag brand to 300 stores in an effort to lure teenagers from Abercrombie & Fitch and American Eagle Oufitters.

Reuters:
- Federal Reserve Bank of St. Louis President William Poole said it’s reasonable for financial markets to expect policy makers will lift interest rates further.

Interfax:
- Russian GDP probably expanded 5.6% in the first half of the year, slower than 7.9% in the same period last year.

Housing Backlogs at 26-year High

- Housing Starts for June were 2004K versus estimates of 2050K and 2004K in May.
- Building Permits for June were 2111K versus estimates of 2085K and 2062K in May.

BOTTOM LINE: US housing starts were unchanged in June, suggesting builders may have paused to finish homes already under construction, Bloomberg reported. Backlogs jumped to a 26-year high, while permits rose. Backlogs rose 7.8% to 241,000 units at an annual rate, up 19% from June 2004. Housing starts will likely increase near-term as builders try to work off the record backlog amid an all-time high home sales pace in the first half. I continue to believe housing will remain strong by historic standards with price appreciation moderating but not plunging.

Links of Interest

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