Existing Home Sales Slightly Lower, Inventories Fall Again

- Existing Home Sales for September fell to 6.18M versus estimates of 6.23M and 6.3M in August.

BOTTOM LINE: Sales of previously owned homes in the US fell last month, Bloomberg reported. The median sales price of an existing home fell 2.2% from a year earlier to $220,000. The number of homes for sale fell 2.4% from the prior month and inventories are at 7.3 months’ supply. Purchases fell 3.7% in the Northeast, 3.1% in the West and 2.8% in the Midwest. Sales rose .4% in the South. The average rate on a 30-year fixed mortgage was 6.41% in September, compared with 6.55% a month earlier, according to Freddie Mac. The fact that inventories fell for a second month is a big positive. I continue to believe that housing is in the process of stabilizing at relatively high levels. The median existing US home price is still 61% higher since 2000.

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Microsoft(MSFT) said it will offer coupons for copies of Windows Vista and Office 2007, costing the company about $1.5 billion in sales in the current quarter.
- The vaccine that helps protect people from influenza is safe for infants and toddlers from 6 months to 2 years old, a study of 45,000 children found.
- Phillip Goldstein, the investment manager who successfully blocked the SEC from requiring hedge funds to register, asked the agency to exempt him from stock disclosure rules.
- Major League Baseball and its players union agreed on a new labor contract, avoiding a work stoppage for only the second time in 34 years amid a business boom for the sport.
- Asian stocks, trading at a five-month high, may have run ahead of expectations for earnings and economic growth, according to Richard Patterson, Citigroup’s head of Asian sales trading.
- The majority of players treated on the field during this year’s World Cup weren’t injured, underlining a growing problem in soccer, the tournament organizer’s top medic said.

Financial Times:
- Ford Motor(F) will not pursue alliances with other carmakers and will keep the Jaguar brand, citing an interview with CEO Mulally.
- China’s economic growth may fall below 10% in 2007 as government curbs on investment and liquidity take effect, the National Development and Reform Commission’s Academy of Macroeconomic Research said.
- Japan, the world’s largest oil consumer after the US and China, imported 8.1% less crude oil in September than a year earlier, the fifth straight monthly decline.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (LXK), target $72.
- Reiterated Buy on (ROP), target $54.

Night Trading
Asian Indices are unch. to +.50% on average.
S&P 500 indicated -.11%.
NASDAQ 100 indicated -.04%.

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Earnings of Note
Company/EPS Estimate
- (AMG)/1.34
- (APD)/.92
- (ATI)/1.36
- (MO)/1.41
- (BUD)/.81
- (ABI)/.25
- (AVB)/.58
- (BEBE)/.21
- (BA)/.63
- (BOB)/.18
- (CBG)/.36
- (CL)/.72
- (COP)/2.40
- (CVG)/.29
- (CCI)/-.10
- (EL)/.19
- (FFIV)/.51
- (FORM)/.33
- (GM)/.49
- (HET)/.99
- (IMCL)/.45
- (JCI)/1.85
- (JNY)/.66
- (KOMG)/1.09
- (MCHP)/.36
- (MNST)/.31
- (MCO)/.52
- (NSC)/.81
- (PFCB)/.21
- (PX)/.73
- (PHM)/.76
- (RSH)/.17
- (RAI)/1.02
- (SEE)/.78
- (SGR)/.18
- (SRCL)/.59
- (SWFT)/.51
- (SYMC)/.26
- (TROW)/.49
- (TEX)/.94
- (TDW)/1.32
- (TSCO)/.47
- (TRID)/.25
- (WY)/.87
- (ZMH)/.75

Upcoming Splits
- (HLSH) 1-for-5

Economic Releases
10:00 am EST
- Existing Home Sales for September are estimated to fall to 6.23M versus 6.3M in August.

2:00 pm EST
- The FOMC is expected to leave the benchmark Fed Funds Rate at 5.25%.

BOTTOM LINE: Asian indices are higher, boosted by automaker shares 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.

Dow Jones Industrial Average Makes Another All-Time High, Boosted by Commodity and Homebuilding Shares

Indices
S&P 500 1,377.38 +.03%
DJIA 12,127.88 +.09%
NASDAQ 2,344.84 -.46%
Russell 2000 762.43 -.14%
Wilshire 5000 13,766.07 +.04%
S&P Barra Growth 638.56 -.11%
S&P Barra Value 736.76 +.16%
Morgan Stanley Consumer 667.81 -.11%
Morgan Stanley Cyclical 861.09 +.85%
Morgan Stanley Technology 544.30 -.44%
Transports 4,731.64 +1.06%
Utilities 448.67 -.11%
Put/Call 3.22 +329.3%
NYSE Arms .91 +29.79%
Volatility(VIX) 10.79 -2.62%
ISE Sentiment 157.0 +12.1%
US Dollar 86.67 -.05%
CRB 307.54 +.47%

Futures Spot Prices
Crude Oil 59.33 +.88%
Unleaded Gasoline 153.0 +3.98%
Natural Gas 7.1 +3.26%
Heating Oil 169.55 +1.59%
Gold 587.50 -.02%
Base Metals 242.43 -1.18%
Copper 341.85 +.01%
10-year US Treasury Yield 4.81% -.21%

Leading Sectors
Steel +4.11%
Oil Tankers +4.08%
Oil Service +3.34%

Lagging Sectors
Software -.99%
Semis -1.13%
Computer Hardware -1.59%

Evening Review
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Afternoon Recommendations
- None of note

Afternoon/Evening Headlines
Bloomberg:
- US stocks rose, sending the Dow Jones Industrial Average to its eighth record in two weeks.
- The US government sued the estate of Enron’s deceased founder Ken Lay, seeking to strip it of $12.7 million in ill-gotten gains from an accounting fraud that cost investors an estimated $30 billion.
- Amazon.com said third quarter net income fell on higher technology spending and costs to run its own toy store. The stock surged 12% after-hours as it bested estimates.

CNBC:
- The Mays family that runs Clear Channel Communications(CCU) has been talking with private equity firms about the possibility of a leveraged buyout.

Frankfurter Allgemeine Zeitung:
- General Electric(GE) plans to double its profit by 2012, citing CEO Immelt.

BOTTOM LINE: The Portfolio finished lower today on losses in my Semi longs, Telecom longs and Commodity shorts. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was modestly negative today as the advance/decline line finished slightly lower, most sectors declined and volume was slightly above average. Measures of investor anxiety were mostly higher into the close. Today's overall market action slightly bearish. However, losses were muted and a number of market-leading stocks posted modest gains. Cyclicals, specifically commodity stocks, outperformed today on strong profit reports. I do not believe this outperformance will last much longer. Homebuilders also outperformed today. While "the worst may well be over for housing," as Greenspan said, I suspect the equities will trade range-bound over the intermediate-term. I also suspect tomorrow's FOMC policy statement may be less hawkish than most expect, however they could use higher stock prices as an excuse to continue to talk hawkish. I still believe there is very little chance the Fed will raise rates again with the 10-year yield anywhere near current levels. A rate cut is still more likely during the first half of next year.

Stocks Slightly Lower into Final Hour on Healthy Profit-taking

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Semiconductor longs, Telecom longs and Commodity shorts. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is modestly negative as the advance/decline line is lower, most sectors are declining and volume is modestly above average. The Johnson Redbook same-store sales index rose 3.4% year-over-year this week vs. a 3.5% rise the prior week. The long-term average is a gain of about 2.9%. There is still no evidence, in my opinion, that a meaningful slowdown in consumer spending is underway, even as many investors continue to worry about such a decline. Housing sales and net home equity extractions have been falling substantially for a year. The Case-Shiller housing futures are still projecting about a 5% decline in the average home price over the next seven months. Considering the average house has appreciated over 50% during the last few years with record high U.S. home ownership, this would be considered a "soft landing." I continue to believe the overall negative effects of housing on the U.S. economy are currently being exaggerated by the bears. I still expect holiday shopping sales to exceed estimates. I believe a healthy labor market, falling energy prices, relatively low long-term interest rates, decelerating inflation, a rising stock market and less irrational pessimism will continue to more than offset slowing housing over the intermediate term. The Morgan Stanley Retail Index (MVRX) has soared 22.8% in about 13 weeks vs. a 11.2% gain in the S&P 500 over the same timeframe. I still expect continued outperformance by the sector through year-end. I expect US stocks to trade modestly higher into the close from current levels on short-covering, strong profit reports and investment manager performance anxiety.

Today's Headlines

Bloomberg:
- North Korea doesn’t plan to test a second nuclear device, a spokesman for China’s Foreign Ministry said today in Beijing.
- Vanguard Group and American Funds joined Fidelity Investments as trillion-dollar mutual-fund managers in the third quarter, lifting total US assets to more than $10 trillion for the first time and further concentrating assets at the top of the industry.
- Iraqi forces should be able to take over the country’s security from coalition troops within 18 months, the top US commander in Iraq said.
- US Treasury Secretary Paulson said he is looking at ways to ease the demands of the Sarbanes-Oxley corporate governance law and class-action lawsuits that are overwhelming some American companies and costing jobs.
- Tuition and fee increases slowed this year at US colleges, the College Board said.
- Global aluminum demand will slow next year as economic growth declines, according to Norsk Hydro ASA, the world’s fourth-largest producer.

Wall Street Journal:
- Exxon Mobil(XOM), Royal Dutch Shell Plc, BP Plc(BP) and other big oil companies may have trouble maintaining surging profit growth now that oil prices have fallen from summer peaks.
- NBC Universal Television Group’s cable networks have decided not to take part in Nielsen Media Research’s new commercial-ratings system to measure the average viewership for all national commercial minutes during a program.
- Cargill Inc., the largest US agricultural company, may today say it plans to participate in a venture that will convert livestock manure into methane gas.
- Residents of San Francisco’s Tenderloin district are fighting to preserve the neighborhood’s seedy atmosphere which they say creates its own personality and helps maintain the city’s diversity.

NY Times:
- Whole Foods Market(WFMI) will start selling meat with an “animal compassionate” label, indicating humane treatment of livestock before slaughter.
- A federal judge ordered the NY Times to reveal sources that columnist Nicholas Kristof used in writing that a former Army scientist was responsible for anthrax attacks in 2001 that left five people dead.
- Democratic Senator Barack Obama of Illinois, who is considering running for president in 2008, said he smoked marijuana and used cocaine before he entered politics. He didn’t use heroin because he didn’t like the person selling it, he said.

NY Post:
- Sotheby’s, the second largest auction house, may reach a record $1 billion in sales for the year during the company’s fall auctions over the next three weeks.
- Transgender people can use any bathroom they choose in Metropolitan Transportation Authority rail stations in NY after a settlement in a case filed by a woman who was arrested three times. The complaint was filed at the city’s Human Rights Commission by a 70-year-old woman who was arrested for using the women’s room at Grand Central Station. Helena Stone, formerly known as Henry McGuinness, also was awarded $2,000 to cover her legal fees.

Star-Ledger of Newark:
- Wynn Resorts(WYNN) would build a new casino on the site of Trump Plaza in Atlantic City, New Jersey, in a deal that’s been discussed by developers Stephen Wynn and Donald Trump.

AP:
- Democratic Senator Joe Lieberman of Connecticut, running for re-election as an independent, exchanged criticism over the Iraq war with Democratic opponent Ned Lamont during the last of three debates. Lamont said President Bush’s policy in Iraq would lead to “failure.” Lieberman said Lamont backs a plan that would cause “retreat and disaster.” Lieberman has the support of 52% of people who plan to vote on Nov. 7, according to the latest polling data, while 35% plan to vote for Lamont.

Frankfurter Allgemeine Zeitung:
- The German output of electricity generated from renewable sources is rising more quickly than the government expected, citing the German electricity networks association.

China Securities Journal:
- China will issue more rules on wind power projects by the end of the year as the government promotes the use of clean energy.

Xinhua News Agency:
- Investment in China’s cement industry, the world’s largest, fell in the first eight months on government curbs.