Wednesday Watch

Late-Night Headlines
Bloomberg:
- Derivative indexes based on subprime mortgages made last year have fallen too low, with investors estimating more losses than there likely will be, Wachovia Corp.(WB) analyst Glenn Schultz said.
- Major Arab allies of the US cautioned today against a rapid troop withdrawal from Iraq that could shake the region, Defense Secretary Robert Gates and Secretary of State Condoleezza Rice said in Egypt.
- Drivers in California, the most-populous US state, used less gasoline in April than the same month a year earlier as average pump prices rose, a state agency said.
- South Korea’s exports grew at the fastest pace in six months in July amid surging demand for cars, semiconductors and mobile phones.
- Rupert Murdoch’s News Corp.(NWS/A) agreed to buy Dow Jones(DJ) for $60 a share, gaining control of the Wall Street Journal and ending the Bancroft family’s 105 years of stewardship, according to two people with knowledge of the transaction.
- Bear Stearns(BSC), manager of two hedge funds that collapsed last month, halted redemptions from a third fund after a slump in credit markets prompted investors to demand their money back.
- The UN Security Council voted to create a peacekeeping mission in the Darfur region of Sudan in an attempt to end a conflict that has killed at least 200,000 people and provoked worldwide protests.
- Citigroup(C), JPMorgan Chase(JPM) and four more banks won’t back out of an agreement to finance the $32 billion takeover of TXU Corp.(TXU) if they fail to sell debt issued in the deal to investors.
- US Treasury Secretary Henry Paulson said legislation to force China to raise the value of its currency is the “wrong approach” and risks provoking a protectionist reaction from other countries.

Wall Street Journal:
- Marathon Oil(MRO) offered to purchase Western Oil Sands for $5.45 billion, which would give the Houston company a foothold in Canada’s massive heavy-oil deposits and deepen ties between the northern Alberta oil reserves and US refineries.

NY Times:
- The FCC moved cautiously Tuesday toward creating a more open national wireless broadband network, handing a partial victory to Google(GOOG), which was pushing for more competition in cellphone sevices.

Financial Times:
- The world’s biggest oil producers have boosted their search for oil and gas to one of the highest levels in two decades as prices on Tuesday neared record highs of more than $78 a barrel.

Daily Telegraph:
- Dow Chemical Co.(DOW), the largest US chemical maker, is considering bidding for Imperial Chemical Industries Plc.

Late Buy/Sell Recommendations
Citigroup:
- Upgraded (DV) to Buy, target $40.
- The head of natural gas purchasing at a large chemical company supported our observation that industrial demand continues to decline. Recent installation of high efficiency burners is helping his company reduce natural gas consumption. Many opportunities to conserve remain and efforts are ongoing. In one example, the savings can be significant according to a leading supplier, potentially reducing natural gas use by 25-40% with the most advanced burners that use oxygen. Recently, a decline in industrial demand has shaved 1-1.5% off of natural gas consumption in the US versus a year ago. While migration of US manufacturing in the chemical and metals industries has been a significant source of demand destruction in the past, we think that conservation is likely to drive long-term demand destruction.

Night Trading
Asian Indices are -1.50% to -.75% on average.
S&P 500 futures -.77%.
NASDAQ 100 futures -.55%.

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Earnings of Note
Company/EPS Estimate
- (ASF)/.39
- (AGN)/.51
- (AT)/.71
- (APPB)/.31
- (BEC)/.75
- (BYD)/.47
- (CA)/.23
- (CI)/.88
- (CTSH)/.53
- (CSC)/.71
- (DVN)/1.47
- (DLB)/.21
- (D)/.99
- (EDS)/.25
- (ERTS)/-.35
- (GRMN)/.74
- (GIVN)/.09
- (GSF)/1.58
- (IVGN)/.76
- (JNY)/.31
- (KFT)/.47
- (LVS)/.25
- (MSO)/-.09
- (MTZ)/.23
- (MA)/1.31
- (MCO)/.69
- (NBL)/1.19
- (OII)/.71
- (OMX)/.32
- (OC)/.27
- (PH)/1.77
- (PRU)/1.72
- (Q)/.15
- (SOHU)/.18
- (SPW)/1.16
- (SBUX)/.21
- (TK)/.82
- (THQI)/-.26
- (TWX)/.20
- (RIG)/1.72
- (DIS)/.55
- (WCW)/.70

Upcoming Splits
- (SJR) 2-for-1

Economic Releases
10:00 am EST
- Pending Home Sales for June are estimated to fall .5% versus a 3.5% decline in May.
- ISM Manufacturing for July is estimated to fall to 55.3 versus a reading of 56.0 in June.
- ISM Prices Paid for July is estimated to fall to 67.0 versus 68.0 in June.
- Total Vehicle Sales for July is estimated to rise to 16.0M versus 15.6M in June.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil drawdown of -1,125,000 barrels. Gasoline supplies are expected to rise by 125,000 barrels. Distillate inventories are expected to rise by 1,325,000 barrels. Finally, refinery utilization is expected to rise by .3%.

Other Potential Market Movers
- The Bank of England Policy Meeting, Keefe Bruyette & Woods Community Bank Conference, Challenger Job Cuts, ADP Employment Change and weekly MBA Mortgage Applications report could also impact trading today.

BOTTOM LINE: Asian indices are lower, pressured by technology and financial stocks in the region. I expect US equities to open modestly lower and to maintain losses into the afternoon. The Portfolio is 50% net long heading into the day.

Stocks Finish at Session Lows on Credit Fears and Rise in Oil

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Stocks Mildly Lower into Final Hour on Lingering Credit Fears and Rise in Energy Prices

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Computer longs and I-Banking longs. I added (IWM)/(QQQQ) hedges and added to my (EEM) short today, thus leaving the Portfolio 75% net long. The overall tone of the market is neutral today as the advance/decline line is neutral, sector performance is mixed and volume is very heavy. My intraday gauge of investor angst is at an elevated level. LoopRumors.com is reporting that today's rumor that Apple (AAPL) is scaling back production of the iPhone is unfounded. The other rumor floating around that iPod production is being cut is also likely unfounded, according to Piper Jaffray. The Piper analyst also thinks that if an iPod production cut is occurring, it may be a sign of a new version coming, which is a positive. I continue to believe that AAPL will move much higher longer term and view any near-term pullbacks as just another buying opportunity. Heavily shorted Under Armour (UA), one of my longs, is soaring 15% to a new record high on a very positive earnings report. As I have said before, I have never seen more reckless shorting in my life. Numerous stocks with 10%+ of the float short have risen by stunning amounts over the last year. As I have said before, I think the days of throwing short darts at stocks with high P/Es and hitting a bull's-eye with little in the way of downside catalysts are over as the “growth style” continues to significantly outperform the “value style.” Weekly retail sales came in with a 2.8% gain for the second straight week. This is up from a weekly average of 0.1% gains from mid-April through mid-May and up from a 1.4% gain earlier this month. I still expect retail sales to head back above average levels this fall as energy prices fall, stocks rise, the job market remains healthy, inflation decelerates to low levels and housing fears subside. I expect US stocks to trade modestly higher into the close from current levels on bargain-hunting, more economic optimism and short-covering.

Today's Headlines

Bloomberg:
- Crude oil is rising above $78 a barrel in NY, nearing a record, on historic investment fund speculation.
- American Home Mortgage Investment(AHM) said it’s unable to fund new loans and may have to liquidate assets.
- The Fed’s Poole said last week’s slump in benchmark US stock indexes was a “typical market upset.” “The market understands, I believe, that the Fed will act in due time if and when evidence accumulates that action would be appropriate,” he said.
- Democratic NY Governor Eliot Spitzer rejected a state senator’s request to appoint a special prosecutor with power to compel sworn testimony in an investigation of allegations the governor’s aides used state police to gather information on a political rival.
- The risk of owning corporate bonds fell by the most in at least three years after GMAC LLC’s mortgage unit posted improved results and Citadel Investment Group LLC bought the assets of a failed hedge fund.

Wall Street Journal:
- US Republican presidential candidate Rudy Giuliani plans to propose a tax deduction of as much as $15,000 per family to purchase health-insurance, citing Giuliani.
- Deutsche Bank AG and Commerzbank AG plan to cut most of their business ties to Iran after increased US pressure on companies to end links to the Middle Eastern nation because of its nuclear policy.
- Some investors may want to bet that pending mergers and acquisitions will be completed because some deals are being discounted on concerns that restricted financing will jeopardize the transactions.
- Bancroft family members controlling 32% of Dow Jones(DJ) favor a sale to News Corp.(NWS/A), likely giving Rupert Murdoch enough support to complete a takeover.

NY Times:
- Builders of new nuclear plants in the US may be eligible for billion of dollars in loan guarantees during the next two years under a one-sentence provision included in the energy bill recently approved by the Senate.
- Liz Claiborne(LIZ) CEO William McComb is trying to reduce the company’s dependence on department stores such as Macy’s in a strategy that may result in the company opening thousands of its own stores.

AFP:
- French President Nicolas Sarkozy outlined cuts in health-care reimbursements paid by the national welfare system during a hospital visit today in Dax, Southern France. The money saved will be shifted to fund research into cancer, Alzheimer disease, and hospice care, the president said.

Xinhua News Agency:
- North Korea cooperated with United Nations inspectors after shutting down its Yongbyon nuclear reactor, citing Adel Tolba, head of the UN monitoring team.

Personal Incomes Rise, Spending Decelerates, Inflation Tame, Purchasing Manager Declines, Consumer Confidence Surges to Cycle Highs

- Personal Income for June rose .4% versus estimates of a .5% gain and a .4% increase in May.

- Personal Spending for June rose .1% versus estimates of a .1% increase and an upwardly revised .6% increase in May.

- The PCE Core for June rose .1% versus estimates of a .2% increase and a .1% gain prior.

- The 2Q Employment Cost Index rose .9% versus estimates of a .9% gain and a .8% increase in 1Q.

- The Chicago Purchasing Manager Index for July fell to 53.4 versus estimates of 58.4 and a reading of 60.2 in June.

- Consumer Confidence rose to 112.6 in July versus estimates of 105.0 and an upwardly revised 105.3 in June.

- Construction Spending for June fell .3% versus estimates of a .2% rise and an upwardly revised 1.1% gain in May.

BOTTOM LINE: Personal spending in the US increase in June, while a gauge of inflation rose less than forecast, suggesting price pressures are easing, Bloomberg reported. While personal spending decelerated, it is rising around average rates over the last three months. As well, personal income growth continues to trend above long-term average rates. The core PCE, the Fed’s favorite inflation gauge, rose just 1.9% year-over-year. This is the smallest increase since March 2004 and within the Fed’s comfort zone of 1-2%. As I have steadfastly said over the past couple of years, I believe we have experienced a mild cyclical uptick in inflation of late, but the secular trend of disinflation remains firmly in tact.

Employment Costs in the US rose at a faster pace in the second quarter as companies spent more on employee benefits, Bloomberg said. Companies are offering better benefit packages to retain skilled employees at a time when the jobless rate has hovered near a six-year low. Strength in the job market has continued to boost consumer spending even as gas prices stay high. I continue to believe the job market will remain healthy over the intermediate-term without generating substantial unit labor cost increases.

A measure of US business activity fell more than forecast in July, Bloomberg reported. The New Orders component of the index fell to 53.4 versus 65.7 the prior month. The Inventories component fell to 55.1 versus 55.9 the prior month. The Prices Paid component rose to 73.1 versus 68.1 the prior month. This gauge had been at very strong levels over the last few months. I suspect it will bounce higher next month.

Consumer confidence in the US soared to a new cycle high in July, spurred by job and income growth and lower gas prices, Bloomberg reported. The Present Conditions component of the index rose to 139.2 from 129.9 the prior month. The Expectations component for the next six months rose to 94.8 versus 88.8 the prior month. The percentage of people saying jobs are plentiful rose to 30.5%, the highest since August 2001, from 27.6% the prior month. The proportion of consumers that said jobs are hard to get fell to 18.4% from 20.5% the prior month. The proportion of Americans that think business conditions are poor is only 14.4%, down from 16.1% the prior month. Those planning to buy an automobile rose to 7.2% versus 6% of consumers the prior month. Consumers in the Central Northeast region are now the lone bastion of extreme pessimism. Confidence in the Central Northeast region came in at a depressed 76.80, notwithstanding recent stock gains, near the level seen at the major bear market lows during 2002. As I forecast early in the year, this measure of confidence reached a new cycle high. I suspect the other main gauge of consumer sentiment will hit a new cycle high this fall as energy prices falling meaningfully, inflation decelerates to low rates, interest rates remain low, housing fears subside, stocks rise further, wage growth continues to substantially outpace inflation and unemployment remains historically low.

Spending on US construction projects unexpectedly fell last month as cutbacks in residential construction surpassed gains in non-residential projects, Bloomberg said. The prior month was revised higher. Private residential construction fell .7%, the 16^th consecutive decline. Non-residential construction rose .1% and was up 14% from year-ago levels. The drag from housing has been diminishing since reaching a 25-year high of 1.3 percentage points of GDP during the third quarter of last year. I continue to believe construction will remain muted over the intermediate-term as homebuilders work down inventories.

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