Thursday Watch

Late-Night Headlines
Bloomberg:
- The yuan may fall for the first day this week after China ordered lenders to hold more foreign currency at the central bank for the first time since 2004, limiting investment and easing pressure on the currency to rise.
- Japan’s industrial production unexpectedly fell .9%.
- A UN deadline for Iran to halt uranium enrichment expires today with the country’s president expressing confidence that the Security Council won’t be able to force it into line.

Economic Daily News:
- Taiwan’s new car sales may drop to a 50-year low in 2006 on rising bad debt levels and oil prices, citing industry officials.

Late Buy/Sell Recommendations
Morgan Stanley:
- Reiterated Overweight on (EBAY).

Night Trading
Asian Indices are +.50% to +1.25% on average.
S&P 500 indicated +.14%.
NASDAQ 100 indicated +.19%.

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Earnings of Note
Company/EPS Estimate
- (BF/A)/.71
- (CAKE)/.28
- (CIEN)/.00
- (DLM)/.04
- (DG)/.15
- (ESL)/.42
- (HRB)/-.29
- (HNZ)/.54
- (JOYG)/.58
- (KWD)/.28
- (NVDA)/.29
- (OVTI)/.40
- (TIF)/.32
- (PAY)/.26
- (WIND)/.05
- (ZLC)/.02

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Personal Income for July is estimated to rise .5% versus a .6% gain in June.
- Personal Spending for July is estimated to rise .8% versus a .4% increase in June.
- The PCE Core for July is estimated to rise .2% versus a .2% gain in June.
- Initial Jobless Claims for last week are estimated to rise to 315K versus 313K the prior week.
- Continuing Claims are estimated to fall to 2478K versus 2492K prior.

10:00 am EST
- Chicago Purchasing Manager for August is estimated to fall to 57.0 versus 57.9 in July.
- Factory Orders for July are estimated to fall .9% versus a 1.2% increase in June.

BOTTOM LINE: Asian indices are higher, boosted by technology stocks in the region. I expect US equities to open modestly higher and to maintain gains into the afternoon. The Portfolio is 100% net long heading into the day.

Stocks Finish Higher on Diminishing Inflation Concerns and Lower Long-term Rates

Indices
S&P 1,304.27 unch.
DJIA 11,382.91 +.11%
NASDAQ 2,185.73 +.62%
Russell 2000 720.58 +.80%
Wilshire 5000 13,044.81 +.09%
S&P Barra Growth 606.37 +.12%
S&P Barra Value 695.74 -.12%
Morgan Stanley Consumer 640.81 +.04%
Morgan Stanley Cyclical 797.09 +.07%
Morgan Stanley Technology 510.51 +1.01%
Transports 4,270.68 -.42%
Utilities 437.17 -1.13%
Put/Call 1.03 +6.19%
NYSE Arms 1.22 +30.91%
Volatility(VIX) 12.22 -.49%
ISE Sentiment 95.00 -34.48%
US Dollar 84.97 +.01%
CRB 327.09 -.20%

Futures Spot Prices
Crude Oil 70.31 +.86%
Unleaded Gasoline 181.50 +1.44%
Natural Gas 6.25 -9.03%
Heating Oil 196.00 +.86%
Gold 626.80 +.11%
Base Metals 227.00 -.52%
Copper 334.00 -.37%
10-year US Treasury Yield 4.75% -.46%

Leading Sectors
Disk Drives +2.14%
Semis +1.80%
Networking +1.36%

Lagging Sectors
Energy -1.62%
Oil Service -2.12%
Oil Tankers -2.17%

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Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- Merck(MRK) won the first reversal of a damage award over its Vioxx painkiller when a judge said a $51 million verdict was “grossly excessive.”
- Verizon Communications(VZ) is dropping plans for a high-speed Internet service surcharge after customers complained and US regulators questioned the fee.
- BHP Billiton(BHP) reached a preliminary agreement in Chile with union leaders at its Escondida copper mine, signaling a possible end to a 24-day strike that disrupted production.
- The ozone layer, the atmospheric shield that protects life on Earth from harmful ultraviolet rays, is on the mend after decades of decline tied to pollution, according to a study to be published in the Sept. 9 Journal of Geophysical Research. At current recovery rates, ozone in the stratosphere could return to 1980 levels by mid-century.
- US Treasuries advanced after the government’s sale of $14 billion of five-year notes met the highest demand in nine years. Yields fell to a five-month low.
- Natural gas plunged 8.5% as lower temperatures cut US power-plant demand for the fuel.

BOTTOM LINE: The Portfolio finished higher today on gains in my Networking longs, Semi longs and Commodity shorts. I did not trade in the final hour, 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 below-average. Measures of investor anxiety were mostly higher into the close. Overall, today's market performance was bullish. The 10-year yield finished near session lows at 4.75%. Despite the reversal higher in oil, oil stocks finished about 2.0% lower, which is an interesting development. I suspect oil has one last period of strength during Sept. before an accelerated downward move begins. Tech outperformed again today, with select semis trading especially well. The Morgan Stanley Tech Index has surged 13.4% over the last six weeks. I expect tech stocks to continue to outperform over the intermediate-term. Tomorrow's same-store-sales reports should meet lowered expectations, however forward guidance will likely remain conservative.

Stocks Modestly Higher into Final Hour as Long-term Rates Continue Decline

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semi longs, Networking longs and Commodity shorts. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are rising and volume is about average. Steel inventories at US service centers have been increasing, even as commercial construction has been booming at the strongest rate in 12 years. With slower global growth on the horizon, declining U.S. auto production and a winding down of the massive Olympic build out in China, I suspect steel prices have made an important top. The Philadelphia Stock Exchange SIG Steel Producers Index (STQ) will likely break down through its 200-day moving average imminently. My favorite shorts are U.S. Steel (X), Oregon Steel Mills (OS), AK Steel Holding (AKS), Schnitzer Steel Industries (SCHN) and Chaparral Steel (CHAP). I am currently short (SCHN). I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering and lower long-term rates.

Today's Headlines

Bloomberg:
- Crude oil fell to a two-month low of $68.65 a barrel after an Energy Department report showed a surge in imports led to an unexpected increase in US inventories.
- China ordered lenders to increase the amount of foreign currency they hold at the central bank for the first time since 2004, limiting cash available for investment and easing pressure on the yuan to strengthen.
- US 10-year Treasuries gained, driving the yield on the benchmark 10-year note to the lowest since March.
- General Motors(GM) is cutting 25% from the renewal price of OnStar’s premium package, which will now include a real-time audio routing service, for 2007 models to retain more subscribers.
- The Federal Reserve signaled it’s in no rush to resume raising interest rates, and may even be done tightening as the slowing economy eases inflation.

Wall Street Journal:
- A dozen major Hollywood film studios such as Walt Disney(DIS) and Twentieth Century Fox are to release 75 films on Blu-ray discs in Japan in the so-called format war with HD DVD technology.
- President Bush plans a series of speeches to highlight the issues and progress of the war in Iraq.
- Dell Inc.(DELL) faces a crisis after it focused on sales of desktop computers to corporations and didn’t build enough capacity to supply demand for laptops.

NY Times:
- The percentage of NYC residents living in poverty is little changed since 2001, when the city was struck by terrorist attacks and had a recession, citing US Census stats.

Washington Post:
- More than 659 million records from more than 50 FBI and other government agencies have been amassed in one database designed to help law enforcement analyze data.
- A computer game company gave its training simulator software free of charge to municipal emergency departments yesterday so employees can train in managing crisis situations.

NY Daily News:
- Nokia Oyj(NOK) is set to open a 1,300-square-foot retail store on East 57th Street off Fifth Avenue in a posh NYC shopping district.

DigiTimes:
- Sony Corp.(SNE) may cut its target shipment of new PlayStation 3 video-game consoles in half by the end of the year to 2 million units because volume production isn’t set yet.

AP:
- An emeritus professor of marketing at the prestigious Wharton School at the University of Pennsylvania has been arrested for the third time in 11 years on child sex charges.

Reuters:
- Ford Motor(F) expects to double its sales of cars in Russia to about 120,000 this year, citing Henrik Nenzen, head of Ford’s Russian unit.

Iran News:
- Iran exports 60% of its crude oil to Asian markets, 32% to Europe and 8% to Africa.

2Q GDP Revised Higher, Salaries and Wages Rise a Strong 7.6%

- Preliminary 2Q GDP rose 2.9% versus estimates of a 3.0% increase and a prior estimate of a 2.5% increase.
- Preliminary 2Q GDP Price Index rose 3.3% versus estimates of a 3.3% gain and a prior estimate of a 3.3% gain.
- Preliminary 2Q Personal Consumption rose 2.6% versus estimates of a 2.5% gain and a prior estimate of a 2.5% gain.
- Preliminary 2Q PCE rose 2.8% versus estimates of a 2.9% increase and a prior estimate of a 2.9% gain.

BOTTOM LINE: The US economy slowed to around long-term average levels in the second quarter, Bloomberg reported. Home construction fell at an annual rate of 9.8% last quarter, the largest drop since 1995. Americans’ salaries and wages rose 7.6%, more than twice the inflation rate and were $100 billion greater than expected. Commercial building investment rose 22.2%, the largest increase since 1994. 2Q GDP grew 6.3% before adjusting for inflation. I still expect US growth to stay around long-term average levels through year-end. There is a 90% correlation between the 10-year yield and core inflation 6 months outs. Moderate US growth and inflation provide the best backdrop for stocks.

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