Stocks Finish Mixed as Oil Reverses Lower

Indices
S&P 500 1,245.04 +.07%
DJIA 10,697.59 +.13%
NASDAQ 2,216.81 -.06%
Russell 2000 683.38 -.75%
DJ Wilshire 5000 12,439.49 -.02%
S&P Barra Growth 597.54 +.04%
S&P Barra Value 643.05 +.11%
Morgan Stanley Consumer 592.44 +.04%
Morgan Stanley Cyclical 763.14 -.25%
Morgan Stanley Technology 509.08 +.34%
Transports 3,802.95 -.37%
Utilities 405.27 +.71%
Put/Call .89 -5.32%
NYSE Arms .94 +1.28%
Volatility(VIX) 11.83 +.68%
ISE Sentiment 272.00 +61.90%
US Dollar 87.99 -.87%
CRB 315.32 -.71%

Futures Spot Prices
Crude Oil 60.95 -1.52%
Unleaded Gasoline 177.05 -.62%
Natural Gas 8.38 +.02%
Heating Oil 168.90 -2.09%
Gold 442.20 -.11
Base Metals 128.33 +.16%
Copper 167.05 -.06%
10-year US Treasury Yield 4.29% -.96%

Leading Sectors
Gold & Silver +4.02%
HMOs +1.31%
Broadcasting +.84%

Lagging Sectors
Homebuilders -1.14%
Steel -1.33%
Airlines -1.45%

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Afternoon Recommendations
Goldman Sachs:
- Reiterated Outperform on CVS and CSCO.
- Reiterated Underperform on MKL.

Afternoon/Evening Headlines
Bloomberg:
- China is likely to let the yuan gain 5% against the dollar by 2007, not enough to slow its economy or end US criticism that the nation has an unfair trade advantage, according to a Bloomberg survey.
- Toyota Motor may generate as much as 25% of it US sales from gasoline-electric hybrid vehicles by 2010.
- Delta Air Lines shares dropped to their lowest in at least 43 years, continuing a slide that has sent the stock down 42% since mid-July amid concerns that the company is closer to filing for bankruptcy.
- A NYSE membership sold for a record $3 million today, surpassing the mark set in August 1999 during heights of the stock market bubble.
- Crude oil is falling for a second day in NY after the US Energy Dept. said inventories rose for the first time in five weeks amid a jump in imports.
- Sprint won approval from US regulators for its proposed $36 billion takeover of Nextel Communications without having to sell any assets.

BOTTOM LINE: The Portfolio finished higher today on gains in my Medical, Semiconductor and Retail longs. I did not trade in the afternoon, thus leaving the Portfolio 100% net long. The tone of the market was modestly negative today as the advance/decline line finished lower, sector performance was mixed and volume was about average. Measures of investor anxiety were mixed into the close. Overall, today’s market action was neutral. Over the last two weeks, oil tanker rates from the Persian Gulf to the U.S. have dropped 13%. They are now down 70% from November 2004 highs. This is with OPEC pumping near 30-year high levels. I do not believe it is too late to short these stocks. I remain overweight short this group.

Stocks Modestly Lower Mid-day, Consolidating Recent Gains

Indices
S&P 500 1,243.53 -.05%
DJIA 10,674.42 -.10%
NASDAQ 2,216.93 -.09%
Russell 2000 684.78 -.54%
DJ Wilshire 5000 12,425.52 -.13%
S&P Barra Growth 596.41 -.15%
S&P Barra Value 642.11 -.04%
Morgan Stanley Consumer 590.98 -.20%
Morgan Stanley Cyclical 762.23 -.37%
Morgan Stanley Technology 507.54 +.04%
Transports 3,793.47 -.62%
Utilities 406.01 +.89%
Put/Call .80 -14.89%
NYSE Arms .91 -2.18%
Volatility(VIX) 11.83 +.68%
ISE Sentiment 258.00 +53.57%
US Dollar 88.00 -.86%
CRB 316.52 -.33%

Futures Spot Prices
Crude Oil 61.60 -.47%
Unleaded Gasoline 179.15 +.56%
Natural Gas 8.34 -.39%
Heating Oil 170.50 -1.17%
Gold 442.70 +1.14%
Base Metals 128.33 +.16%
Copper 167.15 +.54%
10-year US Treasury Yield 4.29% -.92%

Leading Sectors
Gold & Silver +4.41%
Utilities +1.28%
HMOs +1.07%

Lagging Sectors
Steel -1.02%
Homebuilders -1.09%
Airlines -1.24%

BOTTOM LINE: The Portfolio is higher mid-day on gains in my Medical, Retail and Semiconductor longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is slightly negative as the advance/decline line is modestly lower, sector performance is mixed and volume is about average. Measures of investor anxiety are mixed. Today’s overall market action is neutral considering recent gains. The chairman of the board of Barnes & Noble (BKS) has been adding shares even as the stock is close to an all-time high. He recently purchased 12,500 shares at an average price of $40.88. This is the 10th purchase by an insider since the beginning of July. Goldman recently downgraded BKS to Underperform. I do not have a position in this stock. I expect US stocks to trade modestly higher from current levels into the close on short-covering and lower energy prices.

Today's Headlines

Bloomberg:
- Time Warner agreed to pay $2.4 billion to end shareholder lawsuits that claimed its America Online unit overstated revenue.
- The US Treasury Dept. revived the 30-year bond today after a four-year hiatus and said it will sell $44 billion in other notes this quarter to fund the government, the smallest sale in more than two years.
- The euro gained to $1.23 for the first time in almost two months as European services industries grew at a faster pace and the currency rose to a technical level that spurred a further advance.
- Crude oil is falling as speculators pare long positions after a government report showed further increases in US crude supplies.

Wall Street Journal:
- The Mozilla Foundation, a not-for-profit organization that started the free Firefox Web browser, is putting most of its software products into Mozilla, a for-profit subsidiary.
- GM ended an advertising boycott of the LA Times, started because of what the world’s biggest automaker said were factual errors and misrepresentations.
- A backlash against the US Supreme Court ruling that governments can seize property to promote economic development may threaten some projects that depended on the use of eminent domain to acquire land.
- ESL Investments, Tudor Investment Corp. and SAC Capital Advisors are among about 100 hedge funds making their home in Greenwich, Connecticut.
- The FCC could change regulations on telephone companies’ Internet services as early as tomorrow.
- General Atlantic LLC, a US buyout firm, offered $240 million for 20% of the NY Merc.
- The yield advantage for holding US Treasuries over European debt widened close to a five-year high.

NY Times:
- US cable companies are seeking smaller corporate clients that big phone operators tend to neglect by positioning themselves as a better option to the regional Bell providers.
- US hedge fund managers are donating millions of dollars to NY’s philanthropic organizations.

Washington Post:
- America Coming Together, a group funded by billionaire hedge fund manager George Soros that spent tens of millions of dollars trying to unseat President Bush last year, is disbanding.

Reuters:
- China may introduce yuan forwards trading and dollar market makers under a series of changes in foreign-exchange management planned for the next two weeks.

Service Sector Remains Strong, Distillate Inventories Rise Slightly Below Estimates

- The ISM Non-Manufacturing Index for July fell to 60.5 versus estimates of 61.5 and a reading of 62.2 in June.
- The EIA reported that crude oil inventories rose 196K barrels versus estimates of a 1.3M barrel decline. Gasoline inventories declined 4.02M barrels versus estimates of an 800K barrel fall. Distillate inventories rose 1.49M barrels versus estimates of a 2.0M barrel increase.

BOTTOM LINE: July sales at US services companies remained close to the three-month high reached in June, suggesting growth may accelerate in the second half of the year, Bloomberg reported. This gauge represents 87% of the US economy and is still near its all-time high of 66.9 set in April. The new orders component of the index rose to 61.9 from 59.5 the prior month. The backlogs component of the index rose to 53.5 from 52.5 and the export orders component rose to 53.5 from 50. These reading bode well for further US economic strength over the coming months.

Oil is down modestly on the inventory data. As peak gasoline season is coming to an end, distillate supplies will further dominate trading in the commodity.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Toyota Motor, Nissan Motor and Honda Motor, Asia’s largest automakers, raised US sales in July at least 8% each and lost market share as US rivals’ discounts drew even more buyers.

Wall Street Journal:
- Adidas-Saloman AG, the world’s second-largest sporting-goods maker, is in talks to acquire Reebok International Ltd.
- Sony Corp. was voted for the sixth consecutive year in the US the best brand in a Harris Interactive poll.

London-based Times:
- JPMorgan Chase may spend as much as $4 billion in strengthening its US retail banking unit.

China Daily:
- Dell expects to open its second China factory in the first quarter of 2006, helping to double its output of personal computers in the country.

Late Buy/Sell Recommendations
Goldman Sachs:
- Reiterated Outperform on COH, NFP and PAYX.
- Reiterated Underperform on MKL, CHTR, HCC, SIRI, BMC and VICL.

Night Trading
Asian Indices are unch. to +1.0% on average.
S&P 500 indicated -.06%.
NASDAQ 100 indicated -.09%.

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Earnings of Note
Company/EPS Estimate
CKFR/.38
CI/1.55
CVS/.31
DVN/1.26
DUK/.38
EDS/-.03
FSH/.87
OSTK/-.22
QSII/.34
SINA/.21
TWX/.18

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BBY 3-for-2

Economic Releases
10:00 am EST
- ISM Non-Manufacturing for July is estimated to fall to 61.5 versus a reading of 62.2 in June.

10:30 am EST
- Platt’s is estimating crude inventories to fall 1.9M barrels, gasoline inventories to fall 1 million barrels and distillate inventories to rise 1.8M barrels.

BOTTOM LINE: Asian indices are mostly higher on gains in exporting shares in the region. I expect US equities to open modestly lower and to rally later in the afternoon. The Portfolio is 100% net long heading into the day.