Today's Headlines

Bloomberg:
- The US-led multi national force in Iraq officially handed over military control of Baghdad to the Iraqi Army’s Sixth Division, the US military said.
- Delphi Corp. and several former and current senior executives engaged in a series of sham sales of worthless inventory designed to boost the company’s bottom line, shareholders claim in a lawsuit in NY.
- US Treasuries are rising for a second day after an index showed the biggest part of the US economy in September was weaker than forecast.
- Crude oil retreated after a government report showed that US fuel demand fell last week when refinery operating rates plunged because of Hurricane Rita.

Wall Street Journal:
- President Bush urged Congress to help find funding for relief efforts after Hurricane Katrina by trimming the growth in entitlement programs.
- Asian stock markets are booming and benchmark share indices in India, South Korea and Australia have reached records recently, but analysts warn that high energy prices and rising interest rates might curb the rally.
- Honda Motor plans to introduce cars designed to help transport pets.
- Mazda Motor will introduce a concept car this month that runs on a combination of gasoline, electricity and hydrogen, citing the engineer and manager in charge of the automaker’s hydrogen-fuel program.

NY Times:
- Delphi, the biggest US auto-parts supplier, is ready to file for bankruptcy as early as this week.
- Drugmakers such as Pfizer and Sanofi-Aventis SA are investing in treatments that stimulate the human immune system against diseases such as cancer and hepatitis.
- Hackers could disrupt cellular networks in US cities by sending more text messages than the systems can handle.

Boston Globe:
- Genzyme Corp. plans to begin building a research laboratory in Framingham, Massachusetts, which is part of a $210 million expansion of manufacturing and research.

USA Today:
- The acting chief of FEMA promised to meet an Oct. 15 deadline set by President Bush to move Hurricane Katrina evacuees out of shelters and at least offer them temporary housing.

Nihon Keizai:
- Toyota Motor has raised its stake in its fuel cell venture with Matsushita Electric Industrial to 60% from 40%.

ISM Non-Manufacturing Falls on Hurricanes, Pending Home Sales Hit Record

- ISM Non-Manufacturing for September fell to 53.3 versus estimates of 60.0 and a reading of 65.0 in August.
- Pending Home Sales for August rose 3.2% versus estimates of a .5% decline and a .7% fall in July.

BOTTOM LINE: US service industries expanded at the slowest pace in more than two years in September as Hurricanes Katrina and Rita shut down Gulf Coast businesses and pushed costs for materials and supplies to a record, Bloomberg reported. The Prices Paid component of the index rose to 81.4 from 67.1. The employment gauge fell to 54.9 from 59.6. The New Orders component of the index fell to 56.6 from 65.8. I expect this index to bounce back next month as consumer spending has remained healthy despite the effects of the hurricanes.

Links of Interest

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Futures-market predictions that the Federal Reserve will raise its interest rate target by a half-percentage point over two remaining meetings this year are “reasonable,” St. Louis Fed Bank President William Poole said.
- DaimlerChrysler AG’s Chrysler, the No. 3 US automaker, will add a fourth new small sport-utility vehicle next year as near-record gasoline prices push US buyers to more fuel-efficient cars and trucks.

Wall Street Journal:
- TDC A/S, Denmark’s biggest telecommunications operator, received a takeover bid worth about $12 billion from a group of four US and UK private-equity firms.

Financial Times:
- Hewlett-Packard will develop its profitable printer division, rather than sell it, citing an interview with CEO Hurd.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on MSFT, MYL, MERQE and GE.

Night Trading
Asian Indices are -1.25% to -.25% on average.
S&P 500 indicated -.03%.
NASDAQ 100 indicated -.06%.

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Earnings of Note
Company/EPS Estimate
RI/.33
SLR/.04

Upcoming Splits
- None of note

Economic Releases
10:00 am EST
- ISM Non-Manufacturing for September is estimated to fall to 60.0 versus a reading of 65.0 in August.
- Pending Home Sales for August are estimated to fall .5% versus a 1.0% decline in July.

BOTTOM LINE: Asian indices are mostly lower, dragged down by commodity-related companies in the region after the US Fed insinuated further rate hikes. I expect US equities to open mixed and fall modestly later in the day. The Portfolio is 25% net long heading into the day.

Stocks Finish at Session Lows, Led Down by Energy Shares

Indices
S&P 500 1,214.47 -1.0%
DJIA 10,441.11 -.90%
NASDAQ 2,139.36 -.75%
Russell 2000 663.84 -1.0%
DJ Wilshire 5000 12,157.59 -1.0%
S&P Barra Growth 580.39 -.83%
S&P Barra Value 629.89 -1.15%
Morgan Stanley Consumer 587.05 +.21%
Morgan Stanley Cyclical 719.70 -1.09%
Morgan Stanley Technology 503.53 -.96%
Transports 3,695.78 -1.09%
Utilities 429.35 -1.89%
Put/Call .78 -11.36%
NYSE Arms 1.36 +27.18%
Volatility(VIX) 13.20 +5.94%
ISE Sentiment 212.00 -9.28%
US Dollar 90.13 +.04%
CRB 329.72 -1.05%

Futures Spot Prices
Crude Oil 63.86 -.06%
Unleaded Gasoline 202.00 +.21%
Natural Gas 14.29 +.50%
Heating Oil 205.25 +.14%
Gold 469.50 +.04%
Base Metals 130.33 +1.06%
Copper 175.95 -.37%
10-year US Treasury Yield 4.36% -.32%

Leading Sectors
Airlines +2.90%
Drugs +.66%
Disk Drives +.66%

Lagging Sectors
Energy -3.60%
Oil Tankers -3.66%
Computer Hardware -3.72%

Evening Review
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In Play

Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on SLB, CSCO and GE.
- Rated IMCL Outperform.

Banc of America:
- Upgraded EXTR, ANDW and FRX to Buy.

Afternoon/Evening Headlines
Bloomberg:
- One billion people may die from smoking-related illnesses this century, citing Oxford University’s Professor Robert Peto.
- Google and Sun Microsystems will jointly offer online word processing and spreadsheet functions in a direct challenge to Microsoft’s Office products.
- Prudential Equity Group LLC fired its chief technical strategist, Ralph Acampora, as the firm shut its technical analysis department to cut costs.
- Crude oil and gas futures dropped sharply on signs that record prices are curtailing fuel demand as refiners repair units damaged by the hurricanes.

Financial Times:
- Procter & Gamble is considering using alternative ingredients, such as palm kernel oil or coconut oil, to replace crude oil used in detergents and shampoos, to reduce the effects of volatile oil prices, citing the company.

BOTTOM LINE: The Portfolio finished substantially higher today on gains in my Medical longs, Semiconductor longs, Airline longs and Energy-related shorts. I added to my IWM and QQQQ shorts and added OS short in the afternoon, thus leaving the Portfolio 25% net long. The tone of the market was negative today as the advance/decline line finished at session lows, most sectors fell and volume was above average. Measures of investor anxiety were mostly higher into the close. Overall, today’s market action was negative. I continue to expect stocks to trade mixed until later in the month when I expect a vigorous year-end rally to begin.

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.