Stocks Modestly Lower Mid-day on Earnings Jitters

Indices
S&P 500 1,221.72 -.41%
DJIA 10,497.94 -.36%
NASDAQ 2,152.88 -.12%
Russell 2000 670.02 -.08%
DJ Wilshire 5000 12,232.98 -.39%
S&P Barra Growth 583.65 -.27%
S&P Barra Value 633.87 -.53%
Morgan Stanley Consumer 588.89 +.53%
Morgan Stanley Cyclical 724.89 -.38%
Morgan Stanley Technology 507.19 -.24%
Transports 3,732.71 -.12%
Utilities 433.13 -1.03%
Put/Call .65 -26.14%
NYSE Arms 1.17 +9.42%
Volatility(VIX) 12.51 +.32%
ISE Sentiment 235.00 unch.
US Dollar 90.09 -.04%
CRB 329.75 -1.04%

Futures Spot Prices
Crude Oil 63.85 -2.55%
Unleaded Gasoline 200.75 -2.65%
Natural Gas 14.20 +1.31%
Heating Oil 204.00 -2.09%
Gold 469.80 +.11%
Base Metals 130.33 +1.06%
Copper 176.60 +.40%
10-year US Treasury Yield 4.37% -.14%

Leading Sectors %
Airlines +3.98%
Disk Drives +1.21%
Networking +.94%

Lagging Sectors
Computer Hardware -2.57%
Energy -2.60%
Oil Tankers -2.83%

BOTTOM LINE: The Portfolio is substantially higher mid-day on gains in my Semiconductor longs, Airline longs, Medical longs and Energy-related shorts. I added back IWM and QQQQ shorts, thus leaving the Portfolio 75% net long. The tone of the market is neutral as the advance/decline line is about even, sector performance is mixed and volume is above average. Measures of investor anxiety are mixed. Today’s overall market action is negative given the slight decline in long-term rates, decline in energy prices and positive economic data. The Johnson Redbook same-store sales index rose 3.2% year-over-year last week vs. a 3.1% rise the prior week. This week's gain is up from a 1.5% increase in late April and the 22nd week in a row the index has risen 3% or more. Moreover, Mastercard said retail sales other than gasoline and autos rose 6.6% in the week ended Sept. 16 from the year-earlier period. The Morgan Stanley Retail Index has stabilized over the last week and a half, rising about 2.0%. Retail should outperform through year-end. I expect US stocks to trade modestly higher from current levels into the close on declining energy prices and stabilizing long-term rates.

Today's Headlines

Bloomberg:
- Physical exercise in mid-life may lower the risk of developing neurological diseases such as Alzheimer’s or dementia in later years, especially in people who may be genetically predisposed, according to a study published online by the medical journal the Landet.
- Manhattan apartment prices fell 13% in the third quarter, the most in 16 years, evidence the most expensive market in the US may have peaked.
- El Paso, owner of the largest US network of interstate natural-gas pipelines, proposed a new line connecting rising production in Rocky Mountain sates to the eastern US.
- Gasoline prices may fall as the shock of $3/gallon at the pump prompts US motorists to drive less.
- GM’s credit rating may drop more than one level when a review is completed in January, Standard & Poor’s analyst Scott Sprinzen said.
- The US dollar rose to a 16-month high against the yen and traded near a three-month high versus the euro on increasing foreign demand for US assets.
- Crude oil is dropping more than $2/bbl. on signs that record prices are curtailing fuel demand as refiners repair units damaged by the hurricanes.
- American consumers may be defying predictions that they would cut spending after Hurricane Katrina pushed up gas prices and undercut confidence, data from MasterCard International show.
- US Treasuries are rising for the first day in four as yields at the highest in more than seven weeks attracted buyers.

Wall Street Journal:
- World steel industry officials are concerned that over-capacity in China could hurt steel prices in the future even though demand worldwide is currently growing.
- Japanese fans of the ancient 31-syllable tanka style of poetry are using cell phones in growing numbers to write and send verses.
- Several House Republicans are backing a measure to guarantee college students can hear “dissenting” views while protected from retaliation against their politics or religion.
- Mississippi state legislators have approved a bill to allow casinos to move onshore in a bid to help gambling companies recover from damage caused by Hurricane Katrina.
- Time Warner’s AOL unit singed an agreement to distribute its Netscape Web browser in Hewlett-Packard personal computers sold in North America, starting early in 2006.

NY Times:
- Microsoft may announce new games for its new Xbox 360 console at an Amsterdam exhibition this week, including one partially developed by David Jones, an inventor of the Grand Theft Auto and Lemmings series.
- A new US program to provide low-cost health insurance benefits for part-time workers has started to enroll employees at six companies.
- Almost every US city has experienced a real-estate market slowdown since the scorching sales of the spring.
- The NY City school system inappropriately billed Medicaid for almost $200 million of transportation costs from 1993 to 2001.

Bond Buyer:
- Louisiana, Texas, Alabama and Mississippi may issue as much as $60 billion in tax-exempt bonds backed by federal guarantees to provide assistance repairing damage from hurricanes Katrina and Rita.

Philadelphia Inquirer:
- EarthLink Inc. was selected by a Philadelphia city group yesterday to build and maintain a local wireless network.

Washington Post:
- The FBI opened about half as many criminal cases last year as it did four years earlier.

Yale Daily News:
- John Bolton, the US ambassador to the United Nations, was hissed yesterday during a speech on foreign policy at Yale University yesterday.

Factory Orders Show Further Evidence of Strength in Manufacturing

- Factory Orders for August rose 2.5% versus estimates of a 2.0% increase and a 2.5% decline in July.

BOTTOM LINE: Orders placed with US factories rose 2.5% in August, the third increase in four months, signaling manufacturing was gaining strength ahead of Hurricanes Katrina and Rita, Bloomberg reported. Bookings for commercial aircraft surged 9.2% following a 21% decrease in July. Orders for capital goods excluding aircraft, a barometer for future business investment, gained 3.1% after a 3.9% decline in July. The inventory-to-shipments ratio fell to 1.18 months, the lowest level since December, versus 1.2 months the prior month. Unfilled orders rose 1.6% and have now risen 10% over the last 12 months. I continue to believe manufacturing will accelerate through year-end, adding to US growth, as hurricane rebuilding takes hold.

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- Chesapeake Energy said it agreed to buy Columbia Natural Resources LLC from Triana Energy Holdings LLC for $2.2 billion in cash to take advantage of rising natural-gas prices.
- Nissan Motor and Honda Motor, Japan’s No.2 and No.3 automakers, sold more small cars such as Nissan’s Sentra in the US last month, as Asian companies boosted their market share on demand for fuel-efficient vehicles.
- Australian mining engineers fresh out of college are earning as much as 60% more than graduates hired by investment banks as China’s commodities boom saps talent sought by producers including BHP Billiton.

Wall Street Journal:
- The US Agriculture Dept. plans to start testing seemingly healthy cattle for mad-cow disease.

Reuters:
- The Fed’s Guynn says that a “great deal” of policy accommodation has been removed.

Commercial Times:
- Quanta Computer’s global market share may rise in the second half on robust demand for notebook computers.

Taiwan News:
- The Taiwan government will ask Google to change its description of the island as a province of China.

Late Buy/Sell Recommendations
Goldman Sachs:
- None of note

Night Trading
Asian Indices are +.25% to +1.0% on average.
S&P 500 indicated +.02%.
NASDAQ 100 indicated -.09%.

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Earnings of Note
Company/EPS Estimate
- None of note

Upcoming Splits
- None of note

Economic Releases
10:00 am EST
- Factory Orders for August are expected to rise 2.0% versus a 1.9% decline in July.

BOTTOM LINE: Asian indices are higher, boosted by exporting companies in the region after the US dollar gained against the yen. I expect US equities to open modestly higher, led again by tech shares. The Portfolio is 100% net long heading into the day.

Stocks Finish Mixed as Strength in Tech Offset Weakness in Commodity Shares

Indices
S&P 500 1,226.70 -.17%
DJIA 10,535.48 -.31%
NASDAQ 2,155.43 +.17%
Russell 2000 670.55 +.41%
DJ Wilshire 5000 12,281.00 -.02%
S&P Barra Growth 585.25 -.31%
S&P Barra Value 637.25 -.04%
Morgan Stanley Consumer 585.81 -.26%
Morgan Stanley Cyclical 727.64 -.38%
Morgan Stanley Technology 508.39 +.36%
Transports 3,736.59 -.11%
Utilities 437.63 +1.21%
Put/Call .88 +7.32%
NYSE Arms 1.07 +25.55%
Volatility(VIX) 12.46 +4.53%
ISE Sentiment 237.00 +39.41%
US Dollar 90.13 +.68%
CRB 333.22 +.08%

Futures Spot Prices
Crude Oil 65.23 -.11%
Unleaded Gasoline 204.83 -.67%
Natural Gas 14.12 +.73%
Heating Oil 207.00 -.52%
Gold 469.00 -.06%
Base Metals 128.96 -.42%
Copper 175.80 -.06%
10-year US Treasury Yield 4.38% +1.37%

Leading Sectors
Utilities +1.21%
Computer Hardware +1.13%
HMOs +.99%

Lagging Sectors
Insurance -.72%
Steel -1.21%
Oil Tankers -1.25%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on GOOG, QCOM, MYL and PFE.

Afternoon/Evening Headlines
Bloomberg:
- MCI Inc. said it will pay $315 million as part of a settlement with 15 states and the District of Columbia over tax claims.
- The US dollar rose to a 16-month high against the yen and gained versus the euro, while US Treasuries declined after an index of US manufacturing was higher than forecast.
- US Representative Tom Delay was indicted for a second time in a week by a Texas grand jury in connection with alleged campaign fundraising abuses.

Nikkei English News:
- Matsushita Electric Industrial, Hitachi Ltd. and Pioneer Corp. plan to unveil a plasma display panel that runs on half the power consumed by current plasma sets.

BOTTOM LINE: The Portfolio finished higher today on gains in my Internet longs, Semiconductor longs, Airline longs and Oil Tanker shorts. I exited my IWM and QQQQ shorts and added PWR long in the afternoon, thus leaving the Portfolio 100% net long. The tone of the market was modestly positive today as the advance/decline line finished slightly higher, most sectors rose and volume was above average. Measures of investor anxiety were mostly lower into the close. Overall, today’s market action was neutral. The Utility Index is up 51.33% over the last 12 months and is hitting an all-time high today. Historically, this index would be showing some weakness if a substantial increase in inflation was on the horizon.