Wednesday Watch

Late-Night Headlines
Bloomberg:
- The world price of raw sugar, among the worst performing commodities this year, may fall further as oversupply will probably persist until 2009, Peter Baron, executive director of the International Sugar Organization, said.
- Brazil’s state-owned oil and gas company Petrobras announced Tuesday that it expects to start large-scale production of ethanol from cellulose between 2015 and 2020.
- The share of US residents classified as poor fell .3% to 12.3%, the Census Bureau said today. Median household income adjusted for inflation rose to $48,200.

NY Times:
- Politicians, regulators and financial specialists outside the US are seeking a role in the oversight of American markets, banks and rating agencies after recent problems related to subprime mortgages.

CNNMoney.com:
- Google: A safe haven stock?

Reuters:
- Problems in the US subprime mortgage market are unlikely to push the US economy into a recession over the next 12 months, the top economist for a leading US business group said on Tuesday.

Nikkei:
- Toshiba Corp. plans to speed up production of sensors used in mobile-phone cameras by a year to meet demand as handsets use higher resolution optics.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (MRVL), target $22.

Morgan Stanley:
- Reiterated Overweight on (STX), target $33.

Night Trading
Asian Indices are -2.25% to -1.25% on average.
S&P 500 futures -.19%.
NASDAQ 100 futures +.03%.

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Earnings of Note
Company/EPS Estimate
- (BIG)/.12
- (BWS)/.29
- (CHS)/.26
- (CTRN)/.05
- (CWTR)/.12
- (PSS)/.44
- (DLTR)/.33
- (ENER)/-.12
- (FRED)/.09
- (JAS)/-.66
- (JOYG)/.70
- (NOVL)/.02
- (SIGM)/.35
- (TIVO)/-.05
- (WSM)/.16

Upcoming Splits
- (FTI) 2-for-1

Economic Releases
10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil drawdown of -600,000 barrels versus a 1,890,000 barrel increase the prior week. Gasoline supplies are expected to fall by -2,500,000 barrels versus a -5,709,000 barrel decline the prior week. Distillate inventories are estimated to rise by 800,000 barrels versus a 1,356,000 barrel increase the prior week. Finally, refinery utilization is estimated to remain unch. versus a -.2% decline the prior week.

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

BOTTOM LINE: Asian indices are lower, weighed down by financial and automaker 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 Low Volume as Credit Fears Resurface

Indices
S&P 500 1,432.36 -2.35%
DJIA 13,041.85 -2.10%
NASDAQ 2,500.64 -2.37%
Russell 2000 767.83 -2.74%
Wilshire 5000 14,382.27 -2.34%
Russell 1000 Growth 574.52 -2.16%
Russell 1000 Value 804.13 -2.52%
Morgan Stanley Consumer 701.60 -1.82%
Morgan Stanley Cyclical 991.80 -3.17%
Morgan Stanley Technology 610.63 -2.41%
Transports 4732.98 -2.75%
Utilities 477.01 -1.20%
MSCI Emerging Markets 128.04 -2.13%

Sentiment/Internals
Total Put/Call 1.29 +35.79%
NYSE Arms 3.87 +184.17%
Volatility(VIX) 26.30 +15.8%
ISE Sentiment 92.0 -30.83%

Futures Spot Prices
Crude Oil 71.60 -.51%
Reformulated Gasoline 201.90 -1.04%
Natural Gas 5.67 +5.45%
Heating Oil 199.23 -.87%
Gold 671.80 -.65%
Base Metals 236.56 +1.12%
Copper 329.0 -1.97%

Economy
10-year US Treasury Yield 4.51% -5 basis points
US Dollar 80.84 +.13%
CRB Index 304.44 -.38%

Leading Sectors
HMOs -.39%
Gaming -1.08%
Disk Drives -1.27%

Lagging Sectors
Engineering & Construction -3.6%
Steel -4.45%
Homebuilders -4.79%

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Afternoon Recommendations
ThinkEquity:
- Upgraded (RNOW) to Buy.

Afternoon/Evening Headlines
Bloomberg:
- Corn fell the most in more than two weeks and soybeans declined as farmers in the South began their harvest, boosting US supplies that the government estimates will be 14% larger than last year.
- Google Inc.(GOOG) said CFO George Reyes will leave and the biggest Internet search engine company will replace him by year-end.
- NY Senator Hillary Rodham Clinton and Connecticut Senator Chris Dodd won their first endorsements from national labor unions, gaining coveted support in their bids for the Democratic presidential nomination.
- IndyMac Bancorp Inc.(IMB), the biggest US independent home lender, is hiring as many as 850 former employees of bankrupt American Home Mortgage Investment Corp. in a push to issue more loans to people with good credit.
- Seagate Technology(STX), the world’s largest make of hard-disk drives, boosted its sales and profit forecasts for the current quarter. The stock rose 5.5% in after-hours trading.
- Semtech(SMTC), a leading producer of high performance analog and mixed-signal semiconductors, reported net sales for the second quarter rose 3.3% yoy. The stock surged 8.5% in after-hours trading.
- PDL Biopharma(PDLI) will divest all its marketed products, stop developing its lead drug candidate and slash a “substantial” number of jobs in a strategic overhaul. The shares tumbled 15% in extended trading.

AP:
- New Jersey was surpassed by Maryland as the nation’s richest state, according to the latest US Census Bureau statistics.

BOTTOM LINE: The Portfolio finished lower today on losses in my Retail longs, Computer longs and Semi longs. I added to my (SII) short, (BHP) short and to my (IWM)/(QQQQ) 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 substantially lower, every sector fell and volume was below average. Measures of investor anxiety were elevated into the close. Today's overall market action was bearish. In my opinion, the news today wasn't that bad, which makes today's losses more meaningful. As well, the 10-year yield is at session lows at 4.51%, and the yen is at session highs vs. the U.S. dollar. Cyclicals were especially weak today, falling 3.1%. Growth outperformed value, which could be pressuring quant funds again. Nikkei futures are indicating a down 387 open in Japan tonight. I expect stocks to make their lows for the week tomorrow.

Stocks Sharply Lower into Final Hour on Credit, Housing Worries

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Computer longs, Semi longs and Retail longs. I added to my (EEM) short and added (IWM)/(QQQQ) hedges today, thus leaving the Portfolio 75% net long. The overall tone of the market is negative today as the advance/decline line is substantially lower, almost every sector is declining and volume is below average. My intraday gauge of investor angst is back to elevated levels. The Case-Shiller Home Price Index fell more than estimates, but to put the home price decline into perspective, home prices are still 50.4% higher over the last five years and up 120.1% over the last 10. The Fed Aug. 7 minutes were just released. They said that growth estimates by staff economists had been cut and that strains in financial markets jeopardized the expansion. Further turmoil might require a response, they said. For the present, they said that the most likely outcome for the economy was continued moderate growth and that the upside risks to inflation remained the most significant policy concern. The Fed also said mortgage loans remained available to most potential borrowers and that the supply of credit to finance real investment did not appear significantly diminished. The market's initial reaction to these comments was slightly negative. I view them as a bit more constructive than anticipated. With the 10-year yield approaching 4.5%, the odds of an imminent rate cut are likely increasing rapidly. The Fed has a lot of firepower available. Recent Fed actions meaningfully improved credit anxieties. I think a fed funds rate cut would help even more. I expect US stocks to trade modestly higher into the close from current levels on short-covering and bargain hunting.

Today's Headlines

Bloomberg:
- The global economy is “very healthy” and losses from the US subprime mortgage slump have “almost passed,” said Mark Mobius, who oversees $30 billion at Templeton Asset Management Ltd in Singapore.
- Gold and silver are falling for a second day on concern that a slump in global equity markets will reduce investment demand for the precious metals.
- OPEC doesn’t need to increase crude oil production because market supplies are sufficient, OPEC Secretary General Abdulla El-Badri said today.

Wall Street Journal:
- Rich Alumni Stiff Elite Alma Maters, Give to Needier Colleges.

AP:
- Pennsylvania’s welfare rolls have declined to below 1960s levels as job-training and child-care programs allowed more people to enter the workforce.

Financial Times:
- A private bank has seen an increase, since the start of the stock market upheaval, in the number of senior executives wanting to take out “jumbo loans” to buy shares or make investments.

Reuters:
- The Fed acknowledged at its last regular meeting that a policy response might be necessary if financial market conditions worsened, show minutes of its August 7 meeting.

Daily Telegraph:
- Taking cheap drugs designed to lower cholesterol could reduce the risk of developing Alzheimer’s by 80%, scientists say.

Consumer Confidence Falls Less Than Expected

- Consumer Confidence for August fell to 105.0 versus estimates of 104.0 and 111.9 in July.

BOTTOM LINE: Consumer Confidence fell less than economists expected in August, Bloomberg reported. Consumer Confidence is now back to levels seen in June, but still up from 100.2 hit in August of last year. The Present Conditions component of the index fell to 130.3 from 138.3 the prior month. Present Conditions are still well above the long-term average of 113.2. The Expectations component fell to 88.2 versus 94.4 in July. I still expect confidence to move back to cycle highs over the intermediate-term as the job market remains healthy, incomes continue to outpace inflation, inflation decelerates further, interest rates remain historically low, energy prices decline further, housing fears subside and stocks resume their major uptrend.

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