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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Temasek Holdings Pte, Singapore's $130 billion sovereign wealth fund, said it has ``great confidence'' in Merrill Lynch & Co.'s Chief Executive Officer John Thain and plans to raise its stake. Temasek, Merrill’s biggest shareholder, received U.S. antitrust approval yesterday to increase its holding in the third-largest U.S. securities firm from 9.4 percent. Temasek said it wants to lift it to between 13 percent and 14 percent.
- Emerging-market bonds fell, pushing yields relative to Treasuries to their widest in more than a month, amid signs economic growth in Europe is slowing. “There are mounting concerns that the global slowdown is spreading,” said Nick Chamie, head of emerging-market research for RBC Capital Markets in Toronto. “It’s most obvious in Europe now. People are downgrading growth expectations, and that’s hurting emerging-market assets.”
- Paladin Energy Ltd., the Australian producer of uranium in Africa, said output is set to more than double this year as volumes increase at the Langer Heinrich mine in Namibia and a new project starts in Malawi. Production should rise to 3.6 million pounds of uranium oxide in the year ending June 30, 2009, from 1.71 million in the preceding 12 months, Managing Director John Borshoff said on a conference call. Output should increase to 6.8 million pounds the following year, to 7.4 million in 2010-11 and 9.3 million in 2011-12, he said.
- John McCain, in a speech to military veterans, questioned Democratic presidential rival Barack Obama's ``moral clarity'' in times of international crisis. U.S. leaders should speak of the nation's role in the world ``with confidence, gratitude, and above all with moral clarity,'' McCain, an Arizona senator, told members of the American Legion National Convention in Phoenix. ``My opponent had the chance to express such confidence in America when he delivered a much-anticipated address in Berlin. He was the picture of confidence, in some ways,'' McCain said. ``But confidence in oneself and confidence in one's country are not the same.''
- A decline in the number of completed new houses sitting on the market is a sure sign that builders are getting supply under control, said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Conn. The number of new houses for sale at all stages of construction dropped last month to 416,000, the lowest in almost four years, after peaking at a record 570,000 in June 2006. The number of completed houses still on the market has been dropping since January, a sign that inventories may start coming down faster. “That is a big deal for us,” Stanley said. “Builders have culled down the pipeline so dramatically that there is much less new supply coming on the market.” The reduction in completed houses is “a key factor behind future construction and price changes,” Brian Wesbury, chief economist at First Trust Advisors LP in Lisle, Illinois, said in a note to clients. As builders make headway in trimming the glut of completed properties, construction and prices will not need to be cut as much, making the housing slump a smaller headwind for the economy.
- The South Korea won's slump to the weakest since 2004 against the dollar is a ``worry'' and the government will take action when needed, said the finance ministry's key currency official.

Wall Street Journal:
- Europe’s Gloom Is Boon to Dollar. Currency Sheds Whipping-Boy Role As Recession Fears Stir Euro Zone, UK. Early Tuesday, a surprisingly weak reading on a key measure of business confidence in Germany sent the euro skidding to a six-month low against the dollar. The British pound, meanwhile, dropped to its weakest point against the dollar in two years. Analysts say the path ahead is likely down as investors adjust to a world where major economies outside the U.S. experience a sharper-than-expected slowdown and might even tip into recession.
- Retailers Take a Slower Road in India. Coping With Competition, Tepid Growth; ‘Everyone Has Miscalculated’ the Pace. India's expected retail boom hasn't taken off, leaving companies large and small to rethink their expansion plans.
- A JPMorgan Chase(JPM) research report that suggested China is considering spending as much as $58 billion to stimulate the country’s economy was its “own analysis and not a government lead,” citing the report’s author. Figures contained in the Aug. 19 report, which caused stocks in China to rise, were based on the bank’s “own research,” citing Frank Gong, chief China economist at JP Morgan.

MarketWatch.com:
- Crude oil prices "could" fall below $100 per barrel over the next 18 months on slowing worldwide demand and an increase in oil production, Energy Information Administration (EIA) chief Guy Caruso said Tuesday. "I think [prices] could fall below $100 a barrel on slowing global demand and rising production in the US, Brazil and Canada, and from OPEC states such as Saudi Arabia and Angola," Caruso said. Caruso said that even if oil prices continued to fall, it would be unlikely that many policies, such as the Renewable Fuels Standard, which requires the use of 9 billion gallons of biofuels in the US in 2008, might be rolled back or reduced. "There's no going back," he said. "We're near a tipping point here."

NY Post:
- Obama Trails McCain Since Choosing Biden. Barack Obama got exactly zero bounce from his new running mate, Joe Biden, according to a surprising new poll released today - three days after the selection. In fact, John McCain leads in the Gallup Poll, 46 to 44 percent - the Republican candidate's best showing in almost three months. Although McCain's lead still falls within the poll's margin of error, the numbers are a worry for Obama supporters who were counting on Biden's selection as running mate - and the Democratic convention this week - to give them momentum.

CNNMoney.com:
- Six senators join calls to lift drilling ban. Bipartisan ‘Gang of 16’ continues the push for a bill that would allow offshore drilling in southeastern US coast and eastern Gulf of Mexico. Three Democrats and three Republicans joined the so-called Gang of 10, making it the Gang of 16. The group supports a bill that would lift a ban against drilling for oil and natural gas in the eastern Gulf of Mexico and off the southeastern U.S. coast. The bill would also invest $20 billion in the development of petroleum-free motor vehicles and extend tax credits for renewable energy.

Greentechmedia.com:
- Archer Daniels Midland Co. (ADM), Deere & Co. (DE) and Monsanto Co. (MON) said Tuesday that they have teamed up to research and explore technologies for the harvesting, storage and transportation of corn stover for cellulosic ethanol. Corn stover includes the stalks, leaves and cobs of corn plants, and it is among the feedstocks being used by companies to produce large amounts of cellulosic ethanol affordably. While many companies are figuring how to make the biofuel at a commercial scale, the partnership among ADM, Deere and Monsanto will focus on overcoming the challenges of getting the feedstock to biorefineries. The trio's findings will also support the infrastructure for corn stover's other uses, such as animal feed or an energy source for making steam and electricity. Cellulosic-ethanol advocates say the technology to make ethanol from materials like switchgrass, wood chips and corn stover could significantly boost the amount of the fuel that can be made without competing with crops for food.

USA Today.com:
- Despite an economy starting to wobble, incomes were up and more people had health insurance last year, the Census Bureau reported Tuesday. Income inequality even shrank a bit.

Washington Post:
- The carbon emissions of China's electric power sector will jump by about a third this year and surpass the total emissions of the U.S. electric power industry for the first time, according to a report by the Center for Global Development, a Washington- based think tank.

BusinessWeek.com:
- Exchange-traded funds, once hailed as innovative, became a fad. Now investors are starting to sour on these increasingly esoteric investments.

Reuters:
- Sales of business database software made by Microsoft Corp (MSFT) and Oracle Corp (ORCL) are holding up strongly this year after the companies gained share from IBM (IBM) in 2007, according to market research firm Gartner.

Financial Times:
- Lehman Brothers(LEH) has told three private equity firms - Kohlberg Kravis Roberts, Hellman & Friedman and Bain Capital - that they remain in the bidding for its asset management arm even though the investment bank has yet to make a final decision on whether to sell the unit. Lehman is considering options to raise cash before its earnings report next month - including selling a stake in itself or selling all or part of its asset-management arm or its commercial real estate portfolio, according to people familiar with the discussions.
- Pension funds are starting to move into the market for loans that fund indebted companies and buy-outs as they see opportunities for investment bargains. The funds' new investment, although still a small part of the loan market, is a potential boost to the cash-starved lending system. In the past six to eight months, US pension funds have allocated money to invest in leveraged loans through funds managed by groups such as BlackRock, Eaton Vance and ING, and special vehicles set up by private equity funds.
- Shares in Fannie Mae (FNM) and Freddie Mac surged on Tuesday after Citigroup (C) analysts said the two government-sponsored mortgage financiers could withstand losses up to the end of the year and an imminent government rescue was unlikely. Brad Ball, analyst at Citigroup, recommended the stock of both government-sponsored mortgage financiers.

TimesOnline:
- The energy industry has claimed that the public would bear the brunt of a windfall profits tax, giving warning that there was serious risk of bills going up. Half of Britain's energy companies have already raised their bills twice this year and the remainder are set to follow suit before the autumn, taking average household bills just shy of £1,500 a year. The industry said that a windfall tax would lead to more inflation-busting increases, with companies struggling to find money to invest in ageing power stations and networks.

Telegraph:
- The British pound could slide as low as $1.50 against the dollar in the coming years as the exodus of foreign investors from sterling gathers pace, experts have warned. The days of the $2 pound are gone for at least five years, they added, as sterling dropped to a new two-year low against the greenback. Chris Turner, head of FX strategy at ING, said: "The dollar has been in a bear trend since 2002. That is now reversing and we are now embarking on a four- to five-year dollar bull market.

Shanghai Securities News:
- Fund management companies in China lost more than $79 billion in the first half of this year, citing local data provider TX Investment Consulting Co.

Late Buy/Sell Recommendations
Citigroup:
- Rated (INCY) Buy, target $15.
- Rated (RIGL) Buy, target $32.

Night Trading
Asian Indices are -.25% to +1.0% on average.
S&P 500 futures +.02%.
NASDAQ 100 futures +.04%.

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Earnings of Note
Company/EPS Estimate
- (BWS)/.06
- (DLTR)/.41
- (TLB)/-.31
- (MW)/.70
- (JAS)/-.66
- (CWTR)/.01

Economic Releases
8:30 am EST
- Durable Goods Orders for July are estimated unch. versus a .8% increase in June.
- Durable Goods Orders Ex Transports for July are estimated to fall .7% versus a 2.0% increase in June.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil inventory build of +1,100,000 barrels versus a +9,390,000 barrel increase the prior week. Gasoline supplies are expected to fall by -2,450,000 barrels versus a -6,202,000 decline the prior week. Distillate inventories are estimated to rise by +600,000 barrels versus a +481,000 barrel rise the prior week. Finally, Refinery Utilization is expected to rise by .23% versus a -.2% decline the prior week.

Upcoming Splits
- (SYNA) 3-for-2

Other Potential Market Movers
- The Fed’s Lockhart speaking and weekly MBA mortgage applications report could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by technology and energy shares in the region. I expect US equities to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 75% net long heading into the day.

Stocks Finish Mixed as Gains in REIT, Construction, Energy Shares Offset Losses in Airline, Homebuilding, Software Stocks

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In Play

Stocks Mixed into Final Hour as Short-Covering, Bargain-Hunting Offsets Higher Oil, Rising Credit Angst

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Medical longs and Internet longs. I haven’t traded today, thus leaving the Portfolio 75% net long. The tone of the market is slightly negative as the advance/decline line is mildly lower, most sectors are declining and volume is very light. Investor anxiety is slightly above average. Today’s overall market action is mildly bearish. The VIX is falling .67% and is still above-average at 20.89. The ISE Sentiment Index is below average at 123.0 and the total put/call is above average at .90. Finally, the NYSE Arms has been running high most of the day, hitting 1.31 at its peak, and is currently 1.14. The Euro Financial Sector Credit Default Swap Index is rising 5.2% today to 91.34 basis points. This index is up from a low of 52.66 on May 5^th, but down from 129.46 basis points on March 20^th. The North American Investment Grade Credit Default Swap Index is +2.0% to 144.50 basis points. The TED spread is falling 2.8% to 1.11 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 2 basis points to 2.17%, which is still down about 46 basis points in about six weeks. Given escalating tensions with Russia and the fact that analysts expect Hurricane Gustav to hit energy infrastructure in the Gulf, oil’s muted upside reaction is very surprising. While crude would likely temporarily spike higher on any direct hit to this infrastructure, lower lows in oil look likely thereafter as the US dollar continues to rise, supplies hit new records and global demand continues to meaningfully weaken. The Citi eurozone economic surprise index is now -172.30 versus a reading of +50.50 for the US economic surprise index. The (XLF) is trading pretty well, holding support at around $20, given recent concerns. If this doesn’t break lower soon, I suspect we will see some significant short-covering. Nikkei futures indicate an +27 open in Japan and DAX futures indicate an +4 open in Germany tomorrow. 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 US dollar rose to a six-month high against the euro on speculation the greenback will be the main beneficiary of a global economic slowdown as German business confidence dropped in August more than forecast. The U.S. currency was headed for the biggest monthly gain since the 15-nation euro debuted in 1999, increasing to an 11- month high versus the Australian dollar and gaining versus the New Zealand dollar and the Swedish krona. British sterling declined to the weakest level versus the dollar in two years as mortgage approvals held last month near a decade low.
- Federal Reserve policy makers agreed this month that their next change in interest rates will be to raise them, while reaching no conclusion on the timing of such a decision.
- Crude oil rose $1.13/bbl. on forecasts showing that Hurricane Gustav may enter the Gulf of Mexico.
- Corn, soybeans and wheat fell as the US dollar headed for a second straight monthly gain, eroding the appeal of U.S. supplies to importers. The dollar has jumped 5.4 percent in August against a basket of the euro, yen and four other major currencies, and rose 1.1 percent in July. The Reuters/Jefferies CRB Index of 19 raw materials has declined 4.5 percent this month. Corn futures for December delivery fell 7.25 cents, or 1.2 percent, to $5.9275 a bushel at 10:45 a.m. on the Chicago Board of Trade. The price has declined 26 percent from a record $7.9925 on June 27 as crop conditions improved in July after floods in parts of the U.S. Midwest in June. Soybean futures for November delivery slumped 4.75 cents, or 0.4 percent, to $13.4225 a bushel in Chicago. The price has dropped 18 percent from a record $16.3675 on July 3. Wheat futures for December delivery tumbled 14.5 cents, or 1.7 percent, to $8.5025 a bushel in Chicago. The price has plunged 37 percent from the all-time high of $13.495 on Feb. 27.
- Copper dropped on signs that slumping economic growth is spreading globally, spurring concern demand will decline for the metal used in pipes and wires. Business and consumer confidence in Germany, Europe's biggest economy, dropped in July, separate reports showed today. U.K. mortgage approvals last month held close to the lowest in at least 11 years, the British Bankers' Association said. Before today, copper dropped 19 percent from a record in May.
- Russia's RTS Index fell to the lowest level in almost two years and the ruble dropped after the government's decision to recognize Georgia's breakaway regions threatened to deepen a rift with the West. The RTS index of 48 companies posted the biggest decline among 89 global equity measures tracked by Bloomberg, while Russia's currency slid to the lowest level in almost seven months against the dollar. Credit-default swaps on Russian debt climbed 8 basis points, according to CMA Datavision prices in London, as the U.K. Foreign Office ``categorically'' rejected President Dmitry Medvedev's move and Italy and France expressed regret. Investors have pushed the RTS to this quarter's steepest retreat among the world's stock markets as Russia invaded Georgia, tumbling oil prices sent energy producers lower and the government probed steel producer OAO Mechel. Medvedev's statement today accelerated a decline sparked by an earlier drop of more than 2 percent in crude and slumping metal prices.
- Lehman Brothers Holdings Inc.(LEH) may set up a company funded by outside investors to buy some of its mortgage assets, aiming to dispel concern the firm faces crippling losses, people familiar with the discussions said.
- Japanese companies are increasing overseas acquisitions, using their cash-hoards to snap up assets beaten down by the global credit crisis and economic slowdown. The value of foreign purchases by Japanese companies this year has already topped 2007's total by 91 percent, according to data compiled by Bloomberg.
- German business and consumer confidence fell more than economists forecast, heightening concern that Europe's largest economy may be slipping into a recession.
- Investors should buy options to insure themselves against a drop in European stocks by June, and sell similar contracts on U.S. shares as profits in Europe are more at risk, according to Barclays Capital.
- Teva Pharmaceutical Industries Ltd. said its Azilect pill is the first to slow the progression of Parkinson's disease in new findings that may increase sales of the medicine to more than $1 billion.
- New York Times Co.(NYT), the third-largest U.S. newspaper publisher, reported revenue fell 10.1 percent in July as a slumping U.S. economy led to the steepest monthly declines in retail and classified advertising sales this year. Ad sales decreased 16.2 percent to $129.4 million from a year earlier, led by drops of 30.1 percent in classifieds and 13.3 percent in retail ads, the New York-based company said today in a statement.

Wall Street Journal:
- Russell Led Hedge Fund Investors to Losses. Small-Stock Expert Is Winding Down Some Poor Funds.

NY Times:
- Honda Motor Gains in US From Fuel-Efficiency Focus.

hedgeweek:
- Just a day after Barack Obama named Senator Joseph R. Biden Jr. of Delaware as his vice presidential running mate, media reports are tying members of his family to an alleged hedge fund fraud scheme.

Reuters:
- Mozambique’s sugar production may rise to 500,000 metric tons in 2009, citing Antonio Fernando, the company’s trade and industry minister. Production this year will be 295,000 tons compared with 243,000 tons in 2007.

Financial Times:
- Credit Crisis Takes Toll on London.

Sueddeutsche Zeitung:
- European Central Bank Executive Board member Juergen Stark said faster inflation is pushing up euro-zone wages. “Inflation risks over the medium-term have increased,” Stark said. “Broad-based second-round effects add to this.” He expects a period of economic weakness in the euro region followed by a “gradual recovery.”

Kommersant-Ukraine:
- Standard & Poor’s forecast that gross domestic product in Ukraine will grow 6.5% this year and 2.5% in 2009. Annual inflation in 2008 will be 27%, S&P said.

Inquirer.net:
- Asian bond spreads widened Tuesday as renewed concerns over the financial sector and slowing global economic growth kept investors away from riskier assets. "The fixed income markets are signaling to central banks the need to prepare for protracted sub-trend growth," said Brett Williams, a credit analyst at BNP Paribas in an email to clients. "Consecutive quarters of negative growth are already a Japanese phenomenon, and are also being priced in for the UK and euro zone. We see prolonged asymmetric downside price risks to credit valuations."

Bear Radar

Style Underperformer:

Mid-cap Value -.07%

Sector Underperformers:

Airlines irlind (-4.01%), Restaurants (-1.94%) and Homebuilders (-1,39%)

Stocks Falling on Unusual Volume:

STP, MRVL, COCO, SAFM, KNSY, DRI, BIG and PPC

Stocks With Unusual Put Option Activity:

1) GT 2) TMA 3) AEO 4) WYE 5) BIG