Thursday, August 31, 2006

Friday Watch

Late-Night Headlines
Bloomberg:
- Texas Pacific Group and Hellman & Friedman LLC agreed to buy Intergraph Corp.(INGR) for $1.3 billion because of increasing demand for mapping software for homeland security, and oil and gas exploration.
- Chevron Corp.(CVX) is poised to overtake ExxonMobil(XOM) as one of the world’s top five liquefied natural gas producers within a decade when it overcomes environmental objections to a $10.4 billion project in Australia.
- Microsoft Corp.(MSFT) paid out performance bonuses totaling almost $1 billion in stock to 900 of its top employees.
- US Treasury Secretary Henry Paulson, in office seven weeks, is about to ease into the first task of his tenure: persuading China to increase the value of its currency.
- Goldman Sachs Group(GS) cut its forecasts for South Korea’s economic growth this year and next as cooling domestic demand curbs Asia’s third-largest economy.
- Sales of Eli Lilly’s(LLY) Cymbalta antidepressant climbed 92% in the second quarter and CEO Sidney Taurel expects “much more” growth as the drug is sold in more countries and approved to treat a wider range of illnesses.
- Bristol-Myers(BMY) and Sanofi-Aventis SA won a bid to stop generic-drug maker Apotex Inc. from selling its copies of the Plavix heart pill, the world’s second-biggest selling medicine.
- Asahi Tec Corp., a Japanese auto-parts maker controlled by Ripplewood Holdings LLC, may buy US component maker Metaldyne Corp. to help it expand in the world’s biggest auto market.
- Analog Devices(ADI) announced it has collaborated with Legend Silicon Corp., a leading supplier of silicon solutions for broadband wireless broadcasting, to accelerate the development of mobile TV receivers for China with the industry’s first digital TV standard-compliant receiver solution.
- Shares of Aluminum Corp. of China(ACH) fell as much as 4% after the world’s second-biggest alumina producer said it will cut the price of the raw material used to make aluminum for the second time in a month.
- Natural Gas is falling another 3.5% to cycle lows as speculators trim bets on production disruptions.

Wall Street Journal:
- Las Vegas Sands(LVS) plans to spend as much as $15 billion to build an island resort in southern China.
- Electronic Arts(ERTS) said buyers spent $100 million on the video game “Madden NFL 2007” in its first week on the market, an opening-week sales record for the title.

Business Week:
- Technology companies worldwide may see more merger activity as market conditions make the prospect of leveraged buyouts more appealing.

Financial Times:
- China will form industry negotiation groups to secure lower prices for commodities. China will establish the groups to make sure it has a bigger say in price talks for oil, copper and aluminum, citing Wei Jianguo, a vice minister at the Ministry of Commerce.

London-based Times:
- Goldman Sachs Group(GS) will seek to raise $1 billion from its employees to partly finance a $10 billion private equity fund.

Late Buy/Sell Recommendations
Lehman Brothers:
- Investors should reduce bets on how much the yen will gain against the dollar and euro this year on evidence Japan’s economic growth is slowing.

Citigroup:
- Reiterated Buy on (SBUX), target $40.
- After an unusually busy August, we anticipate events in September will provide additional fuel for the rally in semiconductor stocks. Factoring in the benefit of falling oil prices, the potential for a cessation of interest rate hikes, and solid back-to-school results thus far, we reiterate our stance that the SOXX is poised to reach 480-520.

Business Week:
- Shares of AMR Corp.(AMR), parent of American Airlines, could rise 68% in the next 12 months, citing Daniel McKenzie of CSFB.

Night Trading
Asian Indices are -.25% to +.25% on average.
S&P 500 indicated unch.
NASDAQ 100 indicated +.09%.

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- (VIP)/.93

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Economic Releases
8:30 am EST
- The Change in Non-farm Payrolls for August is estimated at 125K versus 113K in July.
- The Change in Manufacturing Payrolls for August is estimated at 0K versus -15K in July.
- The Unemployment Rate for August is estimated to fall to 4.7% versus 4.8% in July.
- Average Hourly Earnings for August are estimated to rise .3% versus a .4% gain in July.

9:45 am EST
- The Final Univ. of Mich. Consumer Confidence reading for August is estimated to rise to 79.2 versus a prior estimate of 78.7.

10:00 am EST
- Construction Spending for July is estimated to fall .1% versus a .3% increase in June.
- ISM Manufacturing for August is estimated to fall to 54.5 versus a reading of 54.7 in July.
- Pending Home Sales for July are estimated to fall 1.5% versus a .4% gain in June.

Afternoon:
- Total Vehicle Sales for August are estimated to fall to 16.5M versus 17.2M in July.
- Domestic Vehicle Sales for August are estimated to fall to 12.8M versus 13.2M in July.

BOTTOM LINE: Asian indices are mixed, as gains in technology stocks are being offset by losses in consumer 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 Mixed as Profit-Taking Offsets More Economic Optimism

Indices
S&P 1,303.83 -.03%
DJIA 11,381.15 -.02%
NASDAQ 2,183.75 -.09%
Russell 2000 720.52 -.01%
Wilshire 5000 13,051.45 +.05%
S&P Barra Growth 605.51 -.14%
S&P Barra Value 696.24 +.07%
Morgan Stanley Consumer 642.32 +.24%
Morgan Stanley Cyclical 802.68 +.70%
Morgan Stanley Technology 508.74 -.35%
Transports 4,282.94 +.29%
Utilities 442.55 +1.23%
Put/Call .88 -14.56%
NYSE Arms 1.19 -5.28%
Volatility(VIX) 12.31 +.74%
ISE Sentiment n/a
US Dollar 85.09 +.13%
CRB 329.02 +.59%

Futures Spot Prices
Crude Oil 70.36 +.47%
Unleaded Gasoline 175.04 -2.86%
Natural Gas 5.98 -4.86%
Heating Oil 195.42 +.24%
Gold 634.30 +.02%
Base Metals 229.24 +.99%
Copper 345.40 -.06%
10-year US Treasury Yield 4.73% -.42%

Leading Sectors
Gold & Silver +1.34%
Utilities +1.23%
Homebuilders +.84%

Lagging Sectors
Energy -.62%
Semis -1.02%
HMOs -1.14%

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Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- Toyota Motor(TM) will build its first UT center for crash-testing and safety research, enhancing its ability to design vehicles solely for the American market.
- Brazil’s economy grew 1.2% in the second quarter, the smallest gain in nine months, as a strengthening currency prompted exporters to pare their workforces and shelve investment plans.
- Lockheed Martin(LMT) won a NASA contract to build a spacecraft that will return US astronauts to the moon, beating a Northrop Grumman(NOC)-led team.
- Natural gas closed at a six-week low, falling another 4% in NY, as mild weather reduced demand for the fuel and speculators pared bets.

Business Week:
- Apple Computer(AAPL) may announce in mid-September that it will add movies for downloading at its iTunes store.

BOTTOM LINE: The Portfolio finished slightly higher today on gains in my Semi longs, Medical longs and Retail 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 higher, sector performance was mixed and volume was about average. Measures of investor anxiety were mostly lower into the close. Overall, today's market performance was bullish. The 10-year yield finished near session lows at 4.73%. The NYSE Arms was at above-average levels throughout the day, which is also a positive. I expect investors to respond positively to tomorrow's employment report, barring a significant shortfall, which I do not anticipate.

Stocks Slightly Higher into Final Hour on Economic Optimism

BOTTOM LINE: The Portfolio is about even into the final hour as gains in my Semi longs, Medical longs and Retail longs are being offset by losses in my Commodity shorts. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are rising and volume is slightly below average. Bloomberg just reported that commodity hedge funds plunged 11.8% in July. This was the third consecutive monthly loss and the worst monthly loss since tracking began in 2001, according to the Center of International Securities and Derivatives Markets. Commodity funds are now down 13.1% from year-ago levels despite a historical run-up in commodity prices. There are now 500 commodity funds in the U.S. compared to 180 at the start of October 2004. I suspect redemptions from many commodity-related funds over the coming months will further pressure prices for commodities. I continue to believe the unwinding of a speculative mania in commodities does not mean the global economy is slowing substantially. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, more economic optimism and lower long-term rates.

Today's Headlines

Bloomberg:
- Scientists genetically altered cells in the body’s immune system to carry a receptor that recognizes melanoma cancer at the molecular level and marks it for destruction, a study says.
- A late surge in back-to-school spending helped many US retailers post August sales gains that topped analysts’ estimates.
- Downtown Manhattan’s office vacancy rate is poised to fall below 10% for the first time since the 9/11 terrorist attacks, according to a forecast by Jones Lang LaSalle, the largest US commercial real estate broker.
- Federal Reserve Chairman Ben S. Bernanke said “strong” growth in US productivity will probably go on for “some time” as companies and industries make better use of computers to raise workers’ per-hour output.
- Goldcorp Inc., Canada’s third-largest producer of the metal, agreed to buy Glamis Gold for about $8.6 billion as a four-year rally spurs mining companies to consolidate.
- Iran has continued uranium enrichment in the past month, a signal the Islamic Republic will ignore today’s UN Security Council deadline to suspend the nuclear work and trigger a debate on sanctions.

Wall Street Journal:
- Kellogg(K), Tyson Foods(TSN) and scores of other companies are adapting snacks to boost sales of school breakfast foods under federally funded programs for children from low-income families.
- Novatel’s(NVTL) new laptop ExpressCard versions for cellular broadband networks are easy to use and work well though they provide different access to high-speed networks.

NY Times:
- A new US National Park Service policy will emphasize conservation of cultural and natural resources in favor of recreational pursuits.

NY Post:
- NY traffic will be as congested as it is in LA in coming decades, citing a study by the Reason Foundation.

AP:
- BP Plc(BP) may be able to resume full production of oil from Prudhoe Bay, Alaska, sooner than expected by diverting the oil around 16 miles of corroded pipelines, citing an executive.
- The new superintendent of the US Military Academy at West Point says applications for the next school year are rising after several years of decline since September 11.

Facts magazine:
- UBS AG(UBS), Europe’s largest bank by assets, dropped business in Iran and Syria this year due to business risks and “economic considerations.”

Personal Incomes Surge 7.1%, Spending Healthy, Inflation Decelerates, Jobless Claims Still Low, Manufacturing Slows Modestly

- Personal Income for July rose .5% versus estimates of a .5% gain and a .6% increase in June.
- Personal Spending for July rose .8% versus estimates of a .8% gain and a .4% increase in June.
- The PCE Core for July rose .1% versus estimates of a .2% increase and a .2% gain in June.
- Initial Jobless Claims for last week were 316K versus estimates of 315K and 318K the prior week.
- Continuing Claims rose to 2486K versus estimates of 2478K and 2483K prior.
- The Chicago Purchasing Manager for August fell to 57.1 versus estimates of 57.0 and a reading of 57.9 in July.
- Factory Orders for July fell .6% versus estimates of a .9% fall and an upwardly revised 1.5% gain in June.
BOTTOM LINE: US consumer spending rose the most since January and a measure of inflation increased less than expected, suggesting a prolonged economic expansion that will let the Fed keep interest rates steady through year-end, Bloomberg said. The report showed Americans’ incomes rose 7.1%, more than twice most inflation measures. Disposable income, the money consumers have after taxes, rose a healthy 6% from year-ago levels. Spending on long-lasting items such as autos and furniture surged 1.6%, the most since January. The PCE Core, the Fed’s favorite inflation gauge, rose a smaller-than-expected .1% in July. I expect income and spending growth to stay around average long-term rates over the intermediate-term. I continue to believe inflation concerns have peaked for this cycle.

The number of US workers filing first-time applications for state jobless benefits fell last week, Bloomberg reported. The four-week moving-average rose to 317,500 from 316,500 the prior week. The unemployment rate among those able to receive benefits, which tracks the US unemployment rate, held steady at 1.9%. I continue to believe the labor market will remain healthy over the intermediate-term without generating substantial unit labor cost increases.

Manufacturing growth in the Chicago area slowed this month as automakers curbed production and some businesses were wary of investing in new equipment and machinery, Bloomberg said. The prices paid index fell to 75.2 from 86.8 the prior month. The new orders component of the index fell to 59.6 from 60.0 the prior month. The employment component of the index rose to 55.1 from 50.5 the prior month. I continue to believe manufacturing will remain around average levels as companies rebuild depleted inventories.

Slower demand for aircraft and automobiles pushed down US factory orders in July for the first time in three months, Bloomberg said. Orders gained 1.1%, excluding volatile transportation equipment orders, spurred by corporate spending on computers and machinery. Bookings for autos fell 7% as carmakers have responded to declining demand for gas-guzzling SUVs. Orders for capital goods excluding aircraft and defense, a gauge of future business spending, rose a healthy 1.6% versus a .9% gain in June. The inventory-to-shipments ratio rose to 1.17 months versus an all-time low of 1.15 months in May. Factory order should remain relatively healthy over the intermediate-term.

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