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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Edward Lampert’s hedge fund group increased its stake in Citigroup Inc.(C) by more than 60%, purchasing almost 9.6 million shares during the second quarter.
- Berkshire Hathaway(BRK/A) bought stakes in Dow Jones(DJ) and Bank of America(BAC) and more than quadrupled its holdings of health insurers UnitedHealth Group(UNH) and WellPoint(WLP).
- China’s industrial production grew in July at the third-fastest pace of this year as exports soared and retail sales climbed. Output rose 18% from a year earlier, the National Bureau of Statistics said. That was less than the 18.5% median estimate of 18 economists surveyed by Bloomberg and slower than June’s 19.4% gain.
- Japan’s Finance Minister Koji Omi said the worst of the US housing-loan crisis may be over, thanks to the world’s largest central banks.

IBD:
- Mutual Funds Stand Strong Vs. Rivals.

Xinhua News Agency:
- China began a two-month campaign to crack down on phony journalists in an effort to “safeguard” the public interest and the credibility of news media.

Late Buy/Sell Recommendations
Citigroup:
- Rated (CPLA) Buy, target $60.

CSFB:
- Rated (LH) Overweight, target $89.

Night Trading
Asian Indices are -2.5% to -1.5% on average.
S&P 500 futures -.38%.
NASDAQ 100 futures -.20%

Morning Preview
US AM Market Call
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Before the Bell CNBC Video(bottom right)
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Earnings of Note
Company/EPS Estimate
- (CAI)/.63
- (DAKT)/.14
- (DE)/1.99
- (LDG)/.62
- (M)/.26
- (NTAP)/.20
- (PETM)/.30
- (CRM)/.09
- (SLE)/.13

Upcoming Splits
- (SHEN) 3-for-1

Economic Releases
8:30 am EST
- The Consumer Price Index for July is estimated to rise .1% versus a .2% gain in June.
- The CPI Ex Food & Energy for July is estimated to rise .2% versus a .2% gain in June.
- The Empire Manufacturing Index for August is estimated to fall to 18.0 versus 26.5 in July.

9:00 am EST
- Net Long-term TIC Flows for June are estimated to fall to $62.8 billion versus $126.1 billion in May.

9:15 am EST
- Industrial Production for July is estimated to rise .3% versus a .5% gain in June.
- Capacity Utilization for July is estimated at 81.7% versus 81.7% in June.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil drawdown of -2,500,000 barrels versus a -4,136,000 barrel decline the prior week. Gasoline supplies are expected to fall by -750,000 barrels versus a -1,723,000 barrel drawdown the prior week. Distillate supplies are estimated to rise by 1,250,000 barrels versus a 974,000 barrel increase the prior week. Finally, Refinery Utilization is expected to rise by .5% versus a -2.37% decline the prior week.

1:00 pm EST
- The NAHB Housing Market Index for August is estimated to fall to 23 versus 24 in July.

Other Potential Market Movers
- The weekly MBA Mortgage Application report could also impact trading today.

BOTTOM LINE: Asian indices are sharply lower, weighed down by financial and commodity stocks in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 50% net long heading into the day.

Stocks Finish at Session Lows on Retail Earnings and Credit Fears

Indices
S&P 500 1,426.54 -1.82%
DJIA 13,028.92 -1.57%
NASDAQ 2,499.12 -1.70%
Russell 2000 762.87 -2.17%
Wilshire 5000 14,321.99 -1.84%
Russell 1000 Growth 575.11 -1.87%
Russell 1000 Value 797.67 -1.79%
Morgan Stanley Consumer 704.08 -1.60%
Morgan Stanley Cyclical 997.48 -2.69%
Morgan Stanley Technology 613.49 -1.64%
Transports 4,850.25 -3.22%
Utilities 482.39 -2.25%
MSCI Emerging Markets 127.02 -2.01%

Sentiment/Internals
Total Put/Call 1.37 +37.0%
NYSE Arms 1.91 +125.40%
Volatility(VIX) 27.68 +4.18%
ISE Sentiment 101.0 -5.61%

Futures Spot Prices
Crude Oil 72.37 +1.05%
Reformulated Gasoline 197.40 +1.88%
Natural Gas 6.98 +2.77%
Heating Oil 198.0 +.69%
Gold 680.20 -.10%
Base Metals 243.47 +.60%
Copper 333.70 -2.81%

Economy
10-year US Treasury Yield 4.73% -3 basis points
US Dollar 81.48 +.54%
CRB Index 311.27 -.10%

Leading Sectors
Biotech +.71%
Medical Equipment -.72%
HMOs -.89%

Lagging Sectors
Road & Rail -3.70%
Homebuilders -4.18%
Oil Tankers -4.54%

Evening Review
Market Performance Summary
WSJ Data Center
Sector Performance
ETF Performance
Style Performance
Commodity Movers
Market Wrap CNBC Video(bottom right)
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GuruFocus.com
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In Play

Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- Newark, NJ, will install acoustic sensors and 50 additional security cameras around the city as part of an effort to reduce gun violence and cut crime, Mayor Cory Booker said today.
- Agilent Technologies(A) said third-quarter profit dropped 19%, more than analysts estimated. The shares fell 11% in after-hours trading.
- Applied Materials(AMAT) said third-quarter profit fell 7.5% after the company filled fewer orders from memory-chip makers. The stock fell $.50 in after-hours trading.
- Copper in NY fell for the fourth time in five sessions on concern that demand for the metal will decline as global economic growth slows.

BOTTOM LINE: The Portfolio finished lower today on losses in my Computer longs, Retail longs and Medical longs. I added to my (EEM) short and (QQQQ)/(IWM) hedges in the final hour, thus leaving the Portfolio 50% net long. The tone of the market was negative today as the advance/decline line finished lower, almost every sector fell and volume was about average. Measures of investor anxiety were elevated into the close. Today's overall market action was bearish. Weekly retail sales rose 2.3% vs. a 2.9% gain the prior week. This is still mildly below average levels but up from 1.4% a month ago. The U.S. Dollar was higher again. As I cautioned a few weeks ago, sentiment had grown far too pessimistic on the greenback. Further modest upside is likely for the US Dollar, in my opinion, which will provide another headwind for commodities. Biotechs were relatively strong today. My favorite remains Gilead Sciences (GILD), and the recent pullback in the stock is providing investors an excellent entry point, in my opinion. The market reacted harshly to any new bit of negative news throughout the day regardless of its validity, which is not the type of action bulls would like to see at a bottom. Volume was only around average on today’s sell-off and the NYSE Arms was very high throughout the day, which are positives. The Nikkei is indicating a down 275 open in Japan.

Today's Headlines

Bloomberg:
- VMware Inc.(VMW) shares soared as much as 91% in their first day of trading, giving the software market a bigger market value than Ford Motor(F).
- Mattel Inc.(MAT) is recalling Chinese-made products for the second time in two weeks on concerns that children will swallow magnets attached to the toys.
- NASA has revised climate data to show 1934 as the hottest US year on record, ousting 1998 and challenging the argument that national temperatures are reaching new highs amid global warming.
- Sentinel Management Group, the Illinois-based firm that manages $1.6 billion, said it asked regulators for permission to freeze client withdrawals because credit-market turmoil made it impossible to trade.

Wall Street Journal:
- BMW AG, Volkswagen AG and other European automakers are gearing up to expand production in the US.
- Many Facebook Inc. users are willing to give such personal information as phone numbers, home addresses and e-mail addresses to strangers, citing a study carried out by Sophos Plc, a computer-security firm.
- Verizon Wireless may be the main beneficiary of a FCC auction of airwaves spectrum early next year.
- A wave of investment in steel mills in the US is a long-term gamble on the strength of the country’s steel market and its manufacturing industries.
- Small US investors who borrowed money, sold stocks short and took out complex options are finding that market volatility has undermined their investments. Many non-professional investors turned to foreign stocks and currencies, so-called “market neutral” funds, commodities futures and short-selling to avoid a possible market decline. Instead, they’re finding that many hedges aren’t working as expected.
- US index funds are going through a price war over expenses, partly because of competition from ETFs.

NY Times:
- More than 100 communities across the US are trying to make neighborhoods safe, affordable and comfortable places to grow old.
- Google Inc.(GOOG) and Microsoft Corp.(MSFT) are developing plans to improve the US health-care system by giving more control to patients.

USA Today:
- US casinos, once confined to tourist destinations in depressed towns, are being built in or near major cities to maximize tax revenue.

Trade Deficit Shrinks, Core Producer Prices Decelerate

- The Trade Deficit for June shrank to -$58.1 billion versus estimates of -$61.0 billion and -$59.2 billion in May.

- The Producer Price Index for July rose .6% versus estimates of a .2% increase and a -.2% decline in June.

- The PPI Ex Food & Energy for July rose .1% versus estimates of a .2% gain and a .3% increase in June.

BOTTOM LINE: The US trade deficit unexpectedly narrowed in June as exports soared to a record, validating the Fed’s forecast that global demand will help the economy rise out the housing slump, Bloomberg said. An improving trade deficit helped boost US economic growth to an above-average 3.4% in 2Q. I expect the deficit to only improve modestly over the intermediate-term.

A measure of inflation at the wholesale level rose less than forecast in July, indicating inflation outside of energy costs remains contained. Food prices fell .1%, the third consecutive monthly decline. Core producer prices rose 2.3% year-over-year versus estimates of a 2.5% gain. Fuel prices rose 2.5% in July versus a 1.1% decline in June. Computer prices fell 3.3% in July. Since this report, energy prices have declined meaningfully. I expect next month’s PPI to show further deceleration in the headline number.

Links of Interest

Market Snapshot Commentary
Market Performance Summary
Style Performance
Sector Performance
WSJ Data Center
Top 20 Biz Stories
IBD Breaking News
Movers & Shakers
Upgrades/Downgrades
In Play
NYSE Unusual Volume
NASDAQ Unusual Volume
Hot Spots
Option Dragon
NASDAQ 100 Heatmap
DJIA Quick Charts
Chart Toppers
Intraday Chart/Quote
Dow Jones Hedge Fund Indexes