Stocks Finish Higher as Energy Prices Fall Sharply from Highs and Fed "pause" Talk Increases

Indices
S&P 500 1,220.33 +.99%
DJIA 10,481.60 +.66%
NASDAQ 2,152.09 +1.05%
Russell 2000 666.51 +1.95%
DJ Wilshire 5000 12,199.09 +1.13%
S&P Barra Growth 584.38 +.95%
S&P Barra Value 631.65 +1.03%
Morgan Stanley Consumer 581.96 +.70%
Morgan Stanley Cyclical 736.16 +.84%
Morgan Stanley Technology 496.38 +.82%
Transports 3,680.86 +.89%
Utilities 407.46 +1.06%
Put/Call .80 -22.33%
NYSE Arms .79 -28.84%
Volatility(VIX) 12.60 -7.69%
ISE Sentiment 134.00 -6.94%
US Dollar 87.58 -.87%
CRB 329.42 -.53%

Futures Spot Prices
Crude Oil 68.90 -.06%
Unleaded Gasoline 261.45 +5.64%
Natural Gas 11.60 +1.31%
Heating Oil 205.30 -1.10%
Gold 439.20 +.25%
Base Metals 129.38 -.74%
Copper 162.30 +.19%
10-year US Treasury Yield 4.01 -1.86%

Leading Sectors
Oil Tankers +4.38%
Homebuilders +3.96%
Oil Service +3.57%

Lagging Sectors
Insurance +.12%
Hospitals -.04%
Gaming -.25%

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Afternoon Recommendations
Goldman Sachs:
- None of note

Afternoon/Evening Headlines
Bloomberg:
- IAC/InterativeCorp, the tv and Internet services company owned by Barry Diller, plans to enter the US real-estate brokerage business next year to expand beyond offering property and mortgage listings on Web sites.
- Hurricane Katrina may harm the US economy more than initially estimated, economists said.
- President Bush said it “will take years” for the US Gulf Coast to recover from Hurricane Katrina and pledged the full resources of the federal government to aiding the storm-ravaged region.
- US Treasuries surged after an index showed Chicago-area manufacturing contracted in August for the first time since 2003 and economists increased worries over the effects of the hurricane.

Cnet News.com:
- Google is buying ad pages in technology publications including PC Magazine and Maximum PC and reselling the space to its online ad clients.

AP:
- New Orleans Mayor Ray Nagins said Hurricane Katrina may have killed hundreds, and possibly thousands, of people in the city.

BOTTOM LINE: The Portfolio finished slightly lower today on losses in my Oil Tanker shorts and Internet longs. I covered a few shorts and added RUTH long in the afternoon, thus leaving the Portfolio 50% net long. I am using an $18 stop-loss on this position. The tone of the market was positive today as the advance/decline line finished substantially higher, almost every sector rose and volume was about average. Measures of investor anxiety were mostly lower into the close. Overall, today’s market action was very positive. Today’s rally was mainly a function of investors’ belief that the Fed may pause for awhile as a result of the spike in gas prices and devastation in the Gulf. While near-term stocks may move higher, another test of the recent lows is likely as more economic data disappoints over the coming weeks. I believe oil has finally seen its highs for the year and will begin an accelerated move downwards over the next few weeks. From now on, any gains in gasoline prices will likely be viewed as a negative for crude prices.

Stocks Modestly Higher Mid-day on Decline in Long-term Rates and Reversal in Energy Prices

Indices
S&P 500 1,211.27 +.24%
DJIA 10,424.76 +.12%
NASDAQ 2,137.25 +.35%
Russell 2000 661.67 +1.21%
DJ Wilshire 5000 12,112.46 +.41%
S&P Barra Growth 580.37 +.26%
S&P Barra Value 626.82 +.25%
Morgan Stanley Consumer 578.04 +.02%
Morgan Stanley Cyclical 730.23 +.02%
Morgan Stanley Technology 493.74 +.30%
Transports 3,655.37 +.20%
Utilities 404.88 +.42%
Put/Call .77 -25.24%
NYSE Arms 1.13 +2.29%
Volatility(VIX) 13.32 -2.34%
ISE Sentiment 134.00 -6.94%
US Dollar 87.60 -.85%
CRB 328.27 -.88%

Futures Spot Prices
Crude Oil 67.80 -2.74%
Unleaded Gasoline 260.00 +5.05%
Natural Gas 11.25 -3.51%
Heating Oil 203.25 -2.09%
Gold 438.50 +.69%
Base Metals 129.38 -.74%
Copper 162.00 -1.64%
10-year US Treasury Yield 4.02% -1.59%

Leading Sectors
Oil Tankers +4.24%
Homebuilders +2.75%
Oil Service +2.34%

Lagging Sectors
Airlines -.64%
Insurance -1.06%
Gaming -1.33%

BOTTOM LINE: The Portfolio is lower mid-day on losses in my Internet longs and Oil Tanker shorts. I added to my IWM and QQQQ shorts this morning, thus leaving the Portfolio 25% net long. The tone of the market is positive as the advance/decline line is higher, sector performance is mixed and volume is below average. Measures of investor anxiety are mixed. Today’s overall market action is very positive given the disappointing Chicago PMI and rise in gas prices. I expect US stocks to trade mixed from current levels into the close as short-covering offsets worries over economic growth.

Today's Headlines

Canceled due to a scheduling conflict. I will post the Mid-day Scoreboard within the hour.

GDP Still Healthy, Chicago PMI Plunges, Distillate Inventories Rise Above Estimates

- Preliminary 2Q GDP rose 3.3% versus estimates of a 3.4% gain and a prior estimate of a 3.4% increase.
- Preliminary 2Q GDP Price Index rose 2.4% versus estimates of a 2.4% gain and a prior estimate of a 2.4% increase.
- Preliminary 2Q Personal Consumption rose 3.0% versus estimates of a 3.4% gain and a prior estimate of a 3.3% increase.
- The Chicago Purchasing Manager Index for August fell to 49.2 versus estimates of 61.0 and a reading of 63.5 in July.
- The EIA reported that crude oil inventories fell 1.52 million barrels vs. estimates of a rise of 1.0 million barrels. Gasoline inventories dropped 508,000 barrels vs. estimates of a 1.63 million barrel decline. Distillate inventories rose 2.75 million barrels vs. expectations of a 1.5 million barrel build.

BOTTOM LINE: The US economy expanded at a 3.3% rate in the second quarter. The Core PCE Price Index, the Fed’s favorite inflation gauge, rose 1.6% in the second quarter versus a 2.4% increase in the first quarter. Growth in the US economy has exceeded 3% for nine straight quarters, the best stretch since the 13 quarters that ended in January-March 1986, Bloomberg reported. A measure of demand, excluding inventories, rose 5.4% in the second quarter. Personal incomes rose at a 6.3% annual rate in the second quarter, twice as much as the Consumer Price Index. Rising incomes have boosted the US economy substantially even as energy prices reach records.

Manufacturing in the Chicago area unexpectedly contracted in August for the first time since April 2003, suggesting record oil prices are slowing factory demand, Bloomberg said. The new-orders component of the index fell to 46.5 from 69.6. The prices paid component rose to 62.9 from 61.3. The employment component of the index fell to 51.7 from 56.6. This sharp move lower is a worrisome development considering the recent spike in energy prices.

The EIA numbers would normally be viewed as bearish for oil.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- US drivers braced for gasoline prices that may average $3 a gallon for regular grade in coming days, after Hurricane Katrina shut down oil refineries near the Gulf of Mexico.
- Japanese government bonds gained, sending 10-year yields to the lowest in more than four weeks, after a government report showed industrial production dropped more than twice as much as expected in July.
- The death toll from Hurricane Katrina may be in the hundreds.
- Australia’s July building approvals fell the most in three years and credit growth had the smallest increase since October 2003, signaling the fifth-biggest Asian Pacific economy is slowing.

Late Buy/Sell Recommendations
Goldman Sachs:
None of note

Night Trading
Asian Indices are -.50% to -.25% on average.
S&P 500 indicated -.17%.
NASDAQ 100 indicated -.29%.

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Economic Releases
8:30 am EST
- Preliminary 2Q GDP is estimated to rise 3.4% versus a prior estimate of 3.4%.
- Preliminary 2Q GDP Price Index is estimated to rise 2.4% versus a prior estimate of a 2.4% gain.
- Preliminary 2Q Personal Consumption is estimated to rise 3.4% versus a prior estimate of a 3.3% increase.

10:00 pm EST
- Chicago Purchasing Manager for August is estimated to fall to 61.0 from 63.5 in July.

10:30 pm EST
- Platt's estimates weekly crude inventories fell 800,000 barrels, gasoline inventories fell 1.7 million barrels, distillate inventories rose 1.4 million barrels and refinery utilization rose .75%.

BOTTOM LINE: Asian indices are lower on increasing concerns over the impact of energy prices on exporters in the region. I expect US equities to open lower, however shares may rise modestly later in the day on short-covering and month-end window-dressing. The Portfolio is 50% net long heading into the day.