Today's Headlines

Bloomberg:
- Saudi Arabian central bank Governor Hamad Saudi al-Sayari said the bank would keep the peg to the US dollar and intervene in markets to maintain the currency system and control the amount of money in the financial system.
- US auto-parts makers including American Axle and Lear rose in NY trading on optimism that General Motors(GM) tentative labor accord would stabilize the industry.
- The risk of owning the bonds of US automakers fell to the lowest in more than two months as General Motors(GM)’s ability to win historic cost concessions from its largest union of workers raised optimism that Ford(F) and Chrysler can do the same.
- Bear Stearns(BSC) shares rose the most in almost two weeks on speculation an Asian company plans to buy a stake in the fifth-largest US investment bank.

Wall Street Journal:
- Technology stocks are posting big gains, after a long period when they were scoffed at by the market, and some money managers say the recent rally is just the beginning.

Reuters:
- Iran sees no need for OPEC to raise production again even after oil prices rose to a record, citing Iranian Acting Oil Minister Gholamhossein Nozari.

O Estado de S. Paulo:
- Petroleo Brasileiro SA(PBR), Brazil’s state controlled oil company, confirmed the discovery of two high-quality oil deposits below a layer of salt off the coast of Espirito Santo state.

Durable Goods Orders Fall After Large Increase the Prior Month

- Durable Goods Orders for August fell 4.9% versus estimates of a 4.0% decline and an upwardly revised 6.1% gain the prior month.

- Durables Ex Transports for August fell 1.8% versus estimates of a 1.0% decline and a downwardly revised 3.4% gain in July.

BOTTOM LINE: Orders for US-made durable goods fell in August after July’s large increase that was the most in almost a year, Bloomberg reported. Demand for autos dropped 6.2% versus an 11% surge in July. In July, auto dealers may have been trying to boost supplies ahead of a possible strike at General Motors(GM). Non-defense capital goods orders ex aircraft, a gauge of future business investment, fell .7% versus a .9% gain in July. However, shipments of those items rose .8% after no change in July. Unfilled orders for capital equipment rose 1.2%, which suggests manufacturers had enough demand to keep manufacturing lines busy over the coming months. Inventories of durable goods fell .1%, the first decline since February 2006. I expect volatile durable goods orders to bounce back next month. I still think manufacturing will help add to overall US growth over the intermediate-term as companies gain confidence in the sustainability of the current expansion and rebuild depleted inventories.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Red Hat Inc.(RHT), the world’s largest seller of Linux operating-system programs, said profit rose 64% after sales of new products topped analysts’ estimates. The shares surged 5.1% in extended trading.
- Treasury Secretary Henry Paulson named a committee of asset managers and a panel of investors to write guidelines intended to help demystify hedge funds and reduce risk in US financial markets.
- Japan, the world’s third-largest oil consumer, imported 3.6% less crude oil in August compared with a year earlier. Imports of oil products, a category that includes gasoline and naphtha, slipped 2.8%. Liquefied petroleum gas imports rose 5.3%.
- Goldcorp Inc.(GG), the world’s third-largest gold producer by market value, plans to spend more than $3 billion to boost output in the next five years rather than buy new assets. “We buy low and sell high, so as the gold price increases, we’re building mines and selling our gold,” CEO McArthur said. “We’re not in purchasing mode, we’re in harvest mode.”
- Ethanol in Chicago fell, matching a two-year low, on concern supplies of the additive are building while the product’s transportation infrastructure lags.
- Indian Finance Minister Palaniappan Chidambaram said policy makers have few options to deal with a rupee exchange rate that is “way above the comfort level” because the currency is set by open markets.

MarketWatch.com:
- Bye-bye subprime loans, hello junk bonds.

NY Times:
- Halo 3 Arrives, Rewarding Gamers, and Microsoft.

CNNMoney.com:
- How to play the real estate bounce-back. 10 cities that are set to rise.

CNBC.com:
- Gloom Over Holiday Sales My Be Overdone.

Financial Times:
- Sovereign wealth funds have invested an estimated $35 billion in the shares of banks, securities houses and asset managers since the beginning of 2006 in a sign of the growing clout that state-backed investment vehicles are wielding in the financial sector.

Reuters:
- NYSE Euronext would be interested in expanding its reach in the Middle East, citing CEO John Thain.
- Steve Case, the founder of the AOL Internet service, is backing a new online payment company that promises to let users transfer funds for free and offer a credit card with sharply lower fees for merchants.
- Vilified as a Holocaust denier, a supporter of terrorism and a backer of Iraqi insurgents, the president of Iran was actually able to make New Yorkers burst into laughter – but not at a joke.

Business Standard:
- Google Inc.(GOOG) and Reliance Communications are in talks to lease part of the Indian company’s Pacific undersea cable network.

China Daily:
- China’s central bank may raise the interest rate on mortgage loans this week to curb rising home prices and property speculation. The People’s Bank of China may increase the rate to 1.1 times the nation’s 7.29% benchmark one-year lending rate. The rate for a five-year mortgage loan could reach as high as 8.61%.

Late Buy/Sell Recommendations
Citigroup:
- Rated (RIMM) Buy, target $115.

Night Trading
Asian Indices are unch. to +.1.0% on average.
S&P 500 futures +.22%.
NASDAQ 100 futures +.25%.

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Earnings of Note
Company/EPS Estimate
- (BBBY)/.52
- (CPRT)/.35
- (GRB)/.11
- (PAYX)/.39

Upcoming Splits
- (FCSX) 3-for-2
- (LPHI) 5-for-4
- (NOV) 2-for-1

Economic Releases
8:30 am EST
- Durable Goods Orders for August are estimated to fall 4.0% versus a 6.0% increase in July.
- Durables Ex Transports for August are estimated to fall 1.0% versus a 3.8% gain in July.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil drawdown of -2,150,000 barrels versus a -3,874,000 barrel decline the prior week. Gasoline supplies are expected to fall by -325,000 barrels versus a 417,000 barrel build the prior week. Distillate inventories are estimated to rise by 1,060,000 barrels versus a 1,564,000 barrel increase the prior week. Finally, Refinery Utilization is expected to fall -1.0% versus a -.97% decline the prior week.

Other Potential Market Movers
- The Fed’s Poole speaking, weekly MBA Mortgage Applications report, (SPW) analyst meeting, Piper Jaffray Solar Power Conference, CSFB Chemical Conference, UBS Global Life Sciences Conference, Merrill Lynch Global Power/Gas Conference, Thomas Weisel Consumer Conference, RBC Financial Institutions Conference and Jeffries Shipping/Logistics/Offshore Services Conference could also impact trading today.

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

Stocks Finish Slightly Higher, Boosted by Tech Shares

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Stocks Slightly Higher into Final Hour, Led by Tech

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semi longs, Computer longs, Medical longs and Biotech longs. I have not traded today, thus leaving the Portfolio 100% net long. The overall tone of the market is slightly negative today as the advance/decline line is mildly lower, sector performance is mixed and volume is about average. The 10-year TIPS spread is falling again as inflation worries continue to diminish rapidly. It is now down to 2.27, falling 8 basis points from the Monday before the Fed lowered rates. Fed funds futures now imply an 88% chance that the Fed lowers its benchmark rate to 4.5% in October vs. only a 12% chance of no change. The JPMorgan Emerging Market Debt Index is now 0.93% higher the last five days, and the Bear Stearns High Yield Index is up 1.4% over that period. The speculative grade credit default swap index is down 13.7% over the last five days, as well. Oil is falling $1.47 per barrel, notwithstanding more dollar weakness. Oil looks like it has topped for the year finally, and I still expect it to fall meaningfully over the coming months, which should provide some relief to consumers. Once again today, many true growth stocks are posting meaningful gains today. I continue to believe that economic growth will remain modestly below trend over the intermediate-term, notwithstanding Fed cuts, which should continue to propel growth stock outperformance. Given today's news, the market's performance is very impressive. This is likely the result of far too many bulls still being underinvested and many bears being way too short, given the stabilization in the credit markets and that the Fed for once is ahead of the curve. P/E multiple expansion looks to be under way in the growth stock universe. However, the S&P 500 is now trading at 15.9x forward estimates, down from 16.1x at the beginning of the year. I hear many pundits say the market isn't cheap, focusing solely on the P/E. First of all, the market has never had to be cheap to rise. Moreover, inflation expectations have fallen substantially over the last year. Just a few months ago, many investors were talking as if a 6% yield on the 10-year was a given. It is now at 4.60%. Many other variables go into the market multiple that investors are will to pay, as well. While earnings growth is slowing, I see few signs that it is about to fall off a cliff, which in my opinion, makes many stocks cheap given the current macro backdrop. If earnings growth stabilizes around current levels, or even picks up a bit due to the Fed rate easing cycle, I expect to see meaningful P/E multiple expansion in the broad market next quarter. The NYSE reported recently that short interest on the exchange, from mid-August through mid-September, fell from 12.47 billion shares to 11.84 billion shares. The 5.0% decrease still leaves NYSE short interest up a stunning 23.4% since mid-February, the largest seven-month percentage jump since at least 1991, when Bloomberg began tracking. I continue to believe the recent parabolic rise in short interest was mainly the result of the avalanche of capital that had flowed into global market neutral funds, which help to pump air into the current U.S. "negativity bubble." Past poor performance and recent events have likely ensured that a significant portion of the capital allocated to these funds will flow back into more positively correlated U.S. stock strategies going forward. That process may already be beginning and could account for some of the recent decline in short interest. It is also noteworthy that public short sales exploded to record highs during the recent correction. Here are the 25 NYSE stocks with the largest percentage increase in their short interest relative to their float from mid-August through mid-September:

1. Jones Apparel Group (JNY, +18.4%)
2. PharMerica (PMC, +12.8%)
3. ExpressJet Holdings (XJT, +11.8%)
4. Rohm & Haas (ROH, +11.6%)
5. WCI Communities (WCI, +9.3%)
6. M/I Homes (MHO, +8.4%)
7. Beazer Homes USA (BZH, +8.1%)
8. Jones Lang Lasalle (JLL, +7.4%)
9. W.W. Grainger (GWW, +7.4%)
10. Deerfield Triarc Capital (DFR, +6.9%)
11. Anworth Mortgage Asset (ANH, +6.4%)
12. Arbor Realty Trust (ABR, +6.1%)
13. MetroPCS Communications (PCS, +5.1%)
14. Thornburg Mortgage (TMA, +4.8%)
15. Georgia Gulf (GGC, +4.7%)
16. Brookfield Homes (BHS, +4.5%)
17. Landry's Restaurants (LNY, +4.3%)
18. USG Corporation (USG, +4.2%)
19. Affiliated Managers Group (AMG, +3.8%)
20. Archstone-Smith Trust (ASN, +3.8%)
21. Marsh & Mclennan Companies (MMC, +3.8%)
22. Parker-Hannifin (PH, +3.7%)
23. Delta Air Lines (DAL, +3.6%)
24. Dillard's (DDS, +3.6%)
25. Marinemax (HZO, +3.6%)

I expect US stocks to trade modestly higher into the close from current levels on short-covering, lower energy prices, strength in the tech sector and investment manager performance anxiety.