Existing Home Sales Fall More Than Estimates

- Existing Home Sales for July fell to 6.33M versus estimates of 6.55M and 6.6M in June.

BOTTOM LINE: Sales of previously owned US homes fell in July to a two-year low, a slowdown that may lead the Fed to keep interest rates steady, Bloomberg said. The number of unsold homes on the market rose to 3.86 million, the highest since at least 1999 and 7.3 months’ supply at the current sales pace. The median price of an existing home rose .9% to $230,000. Sales of condos and co-ops rose 2.8%. Overall, sales fell 5.4% in the Northeast, 5.9% in the Mid-west, 1.2% in the South and 6.4% in the West. The Case-Shiller Housing futures are still only projecting a 4.6% decline in the average home price over the next 9 months, which would be considered a “soft-landing” considering the average home has appreciated over 50% over the last few years.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- The rate of US highway fatalities last year increased for the first time since 1986 as the number of motorcycle deaths rose 13%. Motorcycle fatalities increased to 4,553 from 4,028, and almost 50% of those who died in such accidents last year were not wearing helmets.
- Striking BHP Billiton(BHP) workers at Chile’s Escondida copper mine said they have reduced their demand for improved wages and benefits as the walkout extends to a 16th day.

Wall Street Journal:
- Tome Cruise’s production company, based on the lot of Viacom’s Paramount Pictures since 1992, is setting up an independent operation funded by two hedge funds.

London-based Times:
- Sony Corp.(SNE) hasn’t started manufacturing its PlayStation 3 video game console, which is due to go on sale by the end of the year.

Late Buy/Sell Recommendations
Smith Barney:
- Rated (ALB) Buy, target $64.

Night Trading
Asian Indices are -.75% to unch. on average.
S&P 500 indicated -.07%.
NASDAQ 100 indicated -.13%.

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Earnings of Note
Company/EPS Estimate
- (AMWD)/.66
- (BWS)/.40
- (CHS)/.30
- (CWTR)/.10
- (DLTR)/.27
- (EV)/.33
- (MIK)/.18
- (PSS)/.53
- (PVH)/.47
- (RGS)/.59
- (TECD)/.03

Upcoming Splits
- None of note

Economic Releases
10:00 am EST
- Existing Home Sales for July are estimated to fall to 6.55M versus 6.62M in June.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude drawdown of 1,350,000 barrels. Gasoline supplies are expected to fall by 2,050,000 barrels. Distillate inventories are estimated to rise by 700,000 barrels. Finally, Refinery Utilization is expected to remain unchanged.

BOTTOM LINE: Asian indices are mostly lower, weighed down by exporting stocks in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

Stocks Finish Slightly Higher after Mid-day Profit-taking

Indices
S&P 1,298.83 +.10%
DJIA 11,339.84 -.05%
NASDAQ 2,150.02 +.11%
Russell 2000 707.76 +.34%
Wilshire 5000 12,975.50 +.12%
S&P Barra Growth 601.24 +.10%
S&P Barra Value 695.79 +.10%
Morgan Stanley Consumer 630.37 -.14%
Morgan Stanley Cyclical 794.46 +.21%
Morgan Stanley Technology 497.79 +.31%
Transports 4,302.24 +.13%
Utilities 441.93 +.73%
Put/Call 1.16 -1.69%
NYSE Arms .98 -25.23%
Volatility(VIX) 12.18 -.33%
ISE Sentiment 58.0 -28.40%
US Dollar 85.17 +.64%
CRB 336.67 +.35%

Futures Spot Prices
Crude Oil 72.63 +.25%
Unleaded Gasoline 194.00 +.18%
Natural Gas 6.98 +5.37%
Heating Oil 203.75 +.24%
Gold 632.80 -.19%
Base Metals 232.76 +.53%
Copper 346.00 -.52%
10-year US Treasury Yield 4.80% -.04%

Leading Sectors
Papers +1.35%
Homebuilders +1.0%
Internet +.93%

Lagging Sectors
Retail -.51%
Restaurants -.59%
Insurance -.69%

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Afternoon Recommendations
Deutsche Bank:
- Rated (FPL) Buy, target $52.

Afternoon/Evening Headlines
Bloomberg:
- Medtronic(MDT) said its net income rose 87% in the fiscal first quarter.
- National Semi(NSM) cut its revenue forecast because of lower-than-expected sales to mobile-phone customers.
- Exxon Mobil(XOM) CEO Tillerson wants to expand the company’s oil business in Russia, the world’s biggest crude producer and home of the largest natural-gas reserves on earth.
- The euro dropped the most in a month against the dollar after investor confidence in Germany, Europe’s biggest economy, fell to the lowest since 2001.

BOTTOM LINE: The Portfolio finished slightly higher today on gains in my Retail longs and Computer longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was slightly positive today as the advance/decline line finished modestly higher, most sectors rose and volume was below average. Measures of investor anxiety were mostly higher into the close. Overall, today's market performance was neutral. The Johnson Redbook retail same-store sales index rose 3.2% year over year last week vs. a 3.2% rise the prior week. The long-term average is a gain of around 2.8%. I still see little evidence that a significant decline in consumer spending is beginning, even as investors continue to price this into stocks. I still expect the back-to-school selling season to exceed lowered expectations. Investors will likely soon begin to question their imminent consumer collapse thesis. Retail sales should stabilize around average levels over the intermediate term.

Stocks Slightly Higher into Final Hour on Short-Covering

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Retail longs and Computer longs. I covered my (IWM) and (QQQQ) hedges today, thus leaving the Portfolio 100% net long. The tone of the market is mildly positive as the advance/decline line is slightly higher, sector performance is mixed and volume is below average. Most headline inflation measures are still above-average levels, but are lagging indicators of inflation. The Fed knows this. Thus, I expect members to continue to talk modestly hawkish while taking no additional policy action. More dovish talk will likely occur when headline inflation numbers begin showing meaningful deceleration. The ISE Sentiment Index is plunging again today, down 32% to a depressed level of 55. It has been this low only one other time. I continue to believe most are bearish and the bulls are weak bulls. I had anticipated a mixed week for stocks, but given the set-up I wouldn't be surprised to see another push higher over the next few days. I expect US stocks to trade modestly higher into the close from current levels on short-covering and bargain-hunting.

Today's Headlines

Bloomberg:
- Iran said its is ready to hold “serious negotiations” on its nuclear program, a day after the supreme leader, Ayatollah Ali Khamenei, vowed he wouldn’t bow to UN demands to curtail the possible military effort.
- The euro dropped the most in a month against the dollar after investor confidence in Germany, Europe’s biggest economy, fell to the lowest since 2001.
- Fed Bank of Chicago President Moskow said the central bank may need to resume raising interest rates to reduce inflation and ensure that expectations for higher prices don’t rise.
- A tropical depression that emerged yesterday off the western coast of Africa may become Tropical Storm Debby as early as today.
- Long-time Democratic Connecticut Senator Joe Lieberman, who’s running for re-election as an independent, is in a statistical tie with anti-war Democratic primary winner Ned Lamont, according to a poll taken by the American Research Group.

Wall Street Journal:
- Sylvester Stallone and fellow actor John Cusack are being sued by the federal trustee overseeing collapsed hedge fund Lipper Convertibles LP.
- Citigroup(C) is cutting its credit card reward program as card purchases become more and more an everyday activity.
- More fuel-efficient, cleaner vehicles using laboratory guidelines set by the Environmental Protection Agency are about to appear on US roads.

NY Times:
- Felix Rohatyn, a former Lazard LLC banker who helped save NYC from bankruptcy in the 1970s, will join Lehman Bros.(LEH) as a senior adviser to Chairman and CEO Richard Fuld.
- US and European authorities are seeking expanded access into airline and passenger records to help weed out terror suspects.

NY Post:
- The NYMEX, the world’s largest energy market, plans to cut as many as one fourth of its employees before an IPO.

Financial Times:
- Middle-eastern companies selling equities raised almost $15 billion in the last year, a 400% increase over the year earlier.

al-Hayat:
- A group of Egyptian companies won a $722 million contract to develop oil fields in an offshore buffer zone between Kuwait and Saudi Arabia, citing Egyptian Oil Minister Sameh Fahmy.

AFP:
- Ousted Iraqi dictator Saddam Hussein ordered his forces to kill civilians and exterminate Kurds in northern Iraq, the first witness at his genocide trial testified today.