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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Bear Stearns(BSC) told investors in one of its hedge funds that they won’t get any money back after creditors forced it to sell assets at depressed prices, according to a letter sent by the firm.

NY Times:
- IBM(IBM) Showing That Giants Can Be Nimble.

MarketWatch.com:
- US markets stage technically valid breakout.
- Electronic shopping and shopping for electronics are expected to experience the biggest boosts in back-to-school spending this year, the National Retail Federation said Tuesday.

Reuters:
- Hedge fund firm Black Pearl Asset Management on Tuesday said it will launch portfolios to snatch up cheap subprime mortgage securities battered by the current crisis.

Financial Times:
- China’s air pollution will sicken 20 million people a year with respiratory diseases by 2020, citing estimates from the Organization for Economic Cooperation and Development. An OECD report projects that pollution will also cause 600,000 premature deaths in urban areas and 9 million person-years of work loss due to illness by that date.
- Market insight: Be bullish and watch the bears impale themselves. Headlines herald a US prime-time, subprime mortgage implosion leading to an upcoming credit crunch crisis – destined to sink shares, raise interest rates and impale economies. But this is demonstrable nonsense.

Xinhua News Agency:
- China’s economy showed a “more obvious” trend from fast growth to overheating in the first half of 2007, citing a legislative committee. An “excessive” trade surplus, lending growth and investment expansion were still “prominent” problems in the economy during the first half, the committee said.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (WFC), target $40.
- Reiterated Buy on (TSCO), target $65.50.
- Reiterated Buy on (SBUX), target $40.

Keybanc:
- Rated (WAB), (RAIL) and (GBX) Buy.

Night Trading
Asian Indices are -.50% to +.25% on average.
S&P 500 futures -.56%.
NASDAQ 100 futures -.62%.

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Earnings of Note
Company/EPS Estimate
- (ABT)/.68
- (ADS)/.83
- (ALL)/1.80
- (MO)/1.13
- (DOX)/.51
- (ASD)/1.08
- (BLK)/1.67
- (CTAS)/.54
- (CTXS)/.36
- (CMA)/1.22
- (DAL)/.62
- (DST)/.84
- (EBAY)/.32
- (GCI)/1.20
- (RX)/.39
- (IBM)/1.47
- (JCI)/1.98
- (JPM)/1.09
- (JNPR)/.20
- (LRW)/.35
- (MI)/.85
- (NE)/2.14
- (PFE)/.50
- (PJC)/.74
- (LUV)/.22
- (STJ)/.43
- (TER)/.12
- (UTX)/1.15
- (WM)/.89

Upcoming Splits
- (IOSP) 2-for-1

Economic Releases
8:30 am EST
- The Consumer Price Index for June is estimated to rise .1% versus a .7% gain in May.
- The CPI Ex Food & Energy for June is estimated to rise .2% versus a .1% gain in May.
- Housing Starts for June are estimated to fall to 1450K versus 1474K in May.
- Building Permits for June are estimated to fall to 1480K versus 1520K in May.

10:00 am EST
- Bernanke Report on Economy & Fed Policy.

10:30 am EST
- Bloomberg estimates call for a weekly crude oil drawdown of -500,000 barrels versus a -1,462,000 barrel decline the prior week. Gasoline supplies are expected to rise by 850,000 barrels versus a 1,143,000 barrel build the prior week. Distillate inventories are estimated to rise by 900,000 barrels versus a 760,000 barrel increase the prior week. Finally, Refinery Utilization is expected to rises by .23% versus a .14% increase the prior week.

Other Potential Market Movers
- The weekly Mortgage Applications report, (LRCX) Analyst Meeting, AG Edwards E&P Conference and SEMICON West could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by mining and technology stocks in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 100% net long heading into the day.

DJIA Closes at Another Record High, Boosted by Gains in Tech and Financial Shares

Indices
S&P 500 1,549.37 -.01%
DJIA 13,971.55 +.15%
NASDAQ 2,712.29 +.55%
Russell 2000 849.89 +.17%
Wilshire 5000 15,609.43 unch.
Russell 1000 Growth 617.90 +.11%
Russell 1000 Value 879.11 -.14%
Morgan Stanley Consumer 739.16 -.43%
Morgan Stanley Cyclical 1,126.52 +.13%
Morgan Stanley Technology 653.39 +.64%
Transports 5,397.89 +.36%
Utilities 507.01 -.08%
MSCI Emerging Markets 141.37 unch.

Sentiment/Internals
Total Put/Call .93 +12.05%
NYSE Arms .90 +26.82%
Volatility(VIX) 15.59 +2.90%
ISE Sentiment 169.0 -6.63%

Futures Spot Prices
Crude Oil 74.06 -.12%
Reformulated Gasoline 210.10 -1.19%
Natural Gas 6.34 -.56%
Heating Oil 204.0 -.76%
Gold 665.30 -.15%
Base Metals 258.84 255.39 -.73%
Copper 353.65 -.72%

Economy
10-year US Treasury Yield 5.06% +2 basis points
US Dollar 80.54 +.02%
CRB Index 318.59 -.64%

Leading Sectors
Semis +4.15%
Disk Drives +1.55%
Software +1.33%

Lagging Sectors
Alternative Energy -1.04%
Homebuilders -1.25%
Coal -2.47%

Evening Review
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Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- Intel Corp.(INTC), the world’s largest computer-chip maker, said second-quarter earnings rose 44% on its first sales increase in six periods. The stock fell 3.7% in after-hours trading.
- Senate Majority Leader Harry Reid said lawmakers won’t take up legislation this year that would increase taxes on managers of hedge funds, buyout firms and real-estate partnerships, but may consider it in 2008.
- Yahoo!(YHOO) said second-quarter profit fell 2.3% as Google Inc.(GOOG) extended its lead in Internet search queries and new rivals took sales in display advertising. The stock fell 3.5% in extended trading.
- 3Com(COMS) has been approached by Silver Lake and Bain Capital over the last couple of months as a potential acquisition candidate. The stock is rising 3.2% after-hours.
- Gasoline futures fell to their lowest level in almost three months before a US Energy Dept. report tomorrow that may show another increase in US inventories.
- Soybeans plunged to a two-week low in Chicago, heading for the biggest two-day drop in two years, as rains in the Midwest improved prospects for the US crop.

BOTTOM LINE: The Portfolio finished slightly higher today on gains in my Semi longs, Retail longs, Medical longs and Energy-related shorts. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was mildly positive today as the advance/decline line finished slightly higher, sector performance was mixed and volume was above average. Measures of investor anxiety were above average into the close. Today's overall market action was mildly bullish. The major flaw in the bear case has been housing's overall impact on U.S. stocks. If it were not for housing's still substantial, but diminishing, drag on the U.S. economy, we would likely be facing multiple Fed rate hikes and rising prospects for a hard landing. Instead, U.S. growth is poised to rise around trend levels through year-end, after a weak first quarter, with diminishing inflation concerns and falling prospects for a hard landing. Tech and financial stocks were especially strong today. Numerous semi equipment stocks soared. This is a significant move as cyclical tech is gaining upside traction to join growth tech in substantial market outperformance. The MS Tech Index is now up 15.5% for the year and poised to move much higher over the intermediate term. Until now, the individual has almost completely shunned U.S. stocks. Today's TIC flow data showed a substantial increase in interest from foreign investors for U.S. stocks. As I have said many times before, keeping all investors, especially the US public, excessively pessimistic on U.S. stocks has been one of the bears' main weapons. I continue to believe that the “herd” will eventually turn more optimistic on U.S. stocks which will result in another substantial move higher in the major averages as rising demand and shrinking supply makes for a lethally bullish combination.

DJIA Hits Another All-time High, Surpassing 14,000 on Economic Optimism, Short-Covering, Lower Commodity Prices

BOTTOM LINE: The Portfolio is higher into the final hour on gains in Retail longs, Medical longs, Semi longs and Energy-related shorts. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is positive today as the advance/decline line is higher, most sectors are rising and volume is above average. Corn is falling another 3.4% today and has plunged 26% from its February 26 all-time euphoric high. The record high occurred five days after I warned that the investment frenzy over the commodity may be nearing a crescendo. The Goldman Sachs Agricultural Commodity Index continues to trade poorly, as well, having peaked in June. I suspect fears over food price inflation are also peaking. Eggs, fresh fruit and meat prices all declined in today's PPI release. It is also interesting to note that corn bulls have insisted for a couple of years that supply can't keep up with rising demand, due to ethanol, yet the commodity is in a freefall. I don't think the fundamentals have changed that much. I just think that the record long speculation by investment funds is reversing. The exact same situation has developed in the oil futures market, and almost nobody is acknowledging it. Large speculators are the most net long oil futures in U.S. history, while commercial hedgers -- including some of the very energy companies that oil bulls love -- are the most net short in history. This exact same situation occurred in corn before its imminent top. I suspect this huge red flag, which is currently being ignored, will be viewed as such before year-end. I continue to believe a major double-top in oil is in the process of forming and still plan to meaningfully increase my energy-related short exposure over the next six weeks. I expect US stocks to trade mixed-to-higher into the close from current levels on more economic optimism, buyout speculation, short-covering, investment manager performance anxiety and lower commodity prices.

Today's Headlines

Bloomberg:
- US stocks are rising, sending the DJIA past 14,000 for the first time, after wholesale inflation unexpectedly declined and Goldman Sachs(GS) recommended American Express(AXP) shares.
- Syria rejected President Bush’s proposal for an international conference on the Israeli-Palestinian conflict.
- Goldman Sachs(GS) plans to build the first new office tower on the Jersey City, New Jersey, waterfront since the Sept. 11 terrorist attacks, a $560 million building to rise 500 feet alongside its existing office.
- Corn is dropping for a second session in Chicago as rains in the Midwest were expected to improve prospects for crops. Corn has plunged 26% from late-February euphoric highs.

Wall Street Journal:
- Apollo Management LP, a leveraged-buyout firm started by Leon Black, is planning to list shares on a new Goldman Sachs Group Inc. exchange, which will allow it to raise funds and keep the advantages of staying private.
- Coca-Cola(KO) pushed Sony Corp.(SNE) out of the top position for the first time in seven years in the Harris interactive annual poll of “best brands.”
- Bain Capital LLC is raising $15 billion for its leveraged-buyout fund, yet keeping a third of it aside to alleviate the pressure such big funds feel to invest the money as quickly as possible.
- PNC Financial Services Group(PNC) is among US banks boosting wages, benefits and training to attract better qualified tellers capable of handling more complex tasks.
- China doesn’t plan to disclose estimates of the economic cost of pollution after studies on the subject proved to be sensitive and were suspended, citing officials.
- US cable tv providers are using digital-video recording technology to lure viewers away from satellite TV, citing a report by the Carmel Group.

NY Times:
- Nintendo’s Wii is attracting video game developers and publishers because it is cheaper and easier to build for than its rivals.

AP:
- Wells Fargo(WFC) today will start a new international money transfer service to Mexico, India, Vietnam and other countries.

Daily Telegraph:
- England’s wealth divide between rich and poor is at its widest in more than 40 years, citing a study by the Joseph Rowntree Foundation charity.

Reuters:
- Merrill Lynch’s(MER) CFO on Tuesday said the company has limited risk from two Bear Stearns(BSC) hedge funds that recently collapsed.

Xinhua News Agency:
- China’s gold production rose 15.3% in the first half to 122.2 metric tons because higher prices prompted miners to increase output, citing the National Development and Reform Commission.

Producer Prices Decelerate as Fuel and Food Costs Decline, International Demand for US Assets Hits New Record, Industrial Production Accelerates

- The Producer Price Index for June fell -.2% versus estimates of a .2% gain and a .9% increase in May.

- The PPI Ex Food & Energy for June rose .3% versus estimates of a .2% gain and a .2% increase in May.

- Net Long-term TIC Flows for May rose to $126.1B versus estimates of $73.0B and $80.3B in April.

- Industrial Production for June rose .5% versus estimates of a .5% gain and a -.1% decline in May.

- Capacity Utilization for June rose to 81.7% versus estimates of 81.6% and 81.4% in May.

BOTTOM LINE: Prices Paid to US producers unexpectedly dropped for the first time in five months, restrained by declines in fuel and food costs, Bloomberg reported. Excluding passenger cars, core prices only rose .1%. Fuel prices fell 1.1% led by a 23.9% decline in gas costs. Food prices fell .8% as the cost of eggs, fresh fruit and meats all declined. The price of intermediate goods rose .5% versus a 1.1% increase the prior month. Computer prices fell 3.4% versus a 2% decline the prior month. The core PPI rose 1.8% year-over-year, right at the 20-year average. I continue to believe most measures of inflation have already peaked for this cycle and will continue to show deceleration through year-end.

Foreign buying of US financial assets unexpectedly soared to a new record in May as international investors snapped up American stocks and corporate bonds, Bloomberg said. International demand for U.S. stocks jumped a net $41.9 billion vs. $27.4 billion in April. As well, international demand for U.S. Treasuries jumped by $21.6 billion vs. $376 million in April. It is also interesting to note that Caribbean banking centers, which analysts link to hedge funds, sold a net $28.5 billion of U.S. Treasuries. Despite overall record purchases of US Treasuries, China reduced its holdings by $6.6 billion, which is a positive, in my opinion. Predictions of the demise of international demand for U.S. assets continue to seem way off-base. I continue to believe foreign demand for US assets will remain strong over the intermediate-term.

Industrial Production in the US rose last month by the most since February as factories turned out more automobiles, computers and electronics, Bloomberg reported. Capacity Utilization is still right near the 20-year average. Production of consumer durable goods, including autos, furniture and electronics, rose 1.6% versus a .3% decline the prior month. Motor vehicle production surged 2.5% versus a .5% decline the prior month. Manufacturing of home electronics rose 2.6% in June. I continue to believe inventory rebuilding will help boost US economic growth back to around average rates through year-end.