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Tuesday Watch

Late-Night Headlines
Bloomberg:
- Brazil's growth in consumer spending will slow more than the country's gross domestic product as interest rates rise, hurting sales of everything from automobiles to shoes, Itau Corretora de Valores SA said. ``Personal consumption could fall at twice the rate of GDP between 2008 and 2009, which could lead to a greater deceleration in sales than envisioned,'' Itau analyst Ricardo Fernandez wrote in a note to clients.
- Wheat from Australia, forecast to be the world's third-largest shipper of the grain, is expected to return to the global market in 2008 after two years of drought, helping to ease prices, Malayan Flour Mills Bhd. said. Wheat output in Australia is forecast to rebound to 23.7 million metric tons this harvest, from last year's drought-reduced crop of about 13 million tons. ``The current prospect of a huge crop in the northern hemisphere, as well as improved weather conditions in Australia, will lead to an overall improvement in the global wheat supply and result in lower and affordable wheat prices for both producers and consumers,'' Teh said. ``This will bring food inflation to a more reasonable level.''
- U.S. motorists, paying record prices for gasoline, drove less for a seventh consecutive month in May, pointing toward the first annual drop in road travel since 1980. Vehicle-miles traveled on all U.S. roads fell 3.7 percent in May from a year earlier, the Federal Highway Administration said in a report today. The seven-month slide is the longest streak since 1979, agency spokesman Doug Hecox said.
- Amgen Inc.(AMGN), the world's largest biotechnology company, beat analysts' estimates after sales of its top-selling anemia drugs declined less than expected. The company also raised its full-year earnings forecast. Amgen shares rose as much as 3.3 percent to $62.50 in extended trading.
- Merrill Lynch & Co.(MER) took steps to shore up its endangered credit rating by selling $8.5 billion of stock and liquidating $30.6 billion of money-losing assets at a fifth of their original value. Temasek Holdings, the Singaporean government investment fund that bought shares in Merrill last December to become the firm's biggest investor, will buy $3.4 billion of stock in the new offering, New York-based Merrill said today in a statement. Merrill will book a $2.5 billion expense related to the transaction as well as $5.7 billion of additional writedowns on collateralized debt obligations and associated hedges.
- The mixing of street drugs and alcohol with prescription medications has contributed to a fivefold increase in the number of deaths ascribed to medication errors since the 1980s, according to a study. The combination of a person taking medications at home with alcohol or street drugs, or with both, accounted for 17 percent of the fatal errors in 2004, up from 2.3 percent in 1983, according to a University of California, San Diego study that examined U.S. death certificates. The study was published today in the Archives of Internal Medicine.
- The Australian dollar fell to near its lowest in more than two weeks and the New Zealand dollar traded close to a six-month low on concern global credit-market losses will hinder growth in the South Pacific economies.

MarketWatch.com:
- Phooey to the faint-hearted. Martin Pring lists four key reasons to be optimistic today:

CNBC.com:
- The number of hedge funds registered in the Cayman Islands exceeded 10,000 in June for the first time, another indication that the hedge fund industry continues to grow despite market turmoil, Cayman authorities said Monday. At the end of June, there were 10,037 hedge funds and fund-of-hedge-funds registered in the offshore tax haven, up from 9,413 at the end of 2007, according to the Cayman Islands Monetary Authority (CIMA).
- The recent decline in oil prices is expected to continue amid fresh signs that the rapid run-up in crude prices is curbing demand, particularly in the US, analysts say.

NY Times:
- Clinton Doesn’t Seem to Be High on Obama’s List. When Senator Hillary Rodham Clinton abandoned her bid for the presidency and endorsed Senator Barack Obama in June, she made clear that she was interested in becoming his running mate, and Mr. Obama and his associates signaled respectfully that she would get full consideration. But there is mounting evidence that Mr. Obama’s interest in Mrs. Clinton for the post has faded considerably, if, in fact, she ever really was a strong contender to be on the ticket with him.
- China Taking Larger Role in World Trade Negotiations.
- For the first time, Comedy Central’s “Daily Show” with Jon Stewart and “The Colbert Report” will be broadcasting a political advertisement, one promoting Senator Barack Obama. MoveOn will spend $150,000 to run it for one week on Comedy Central and MTV, which had not accepted political advertising for more than a decade but reversed that policy a month ago. Both MTV and Comedy Central are owned by Viacom Networks(VIA/B).

MIT Tech Review:
- Boosting Cellulosic Biofuels. The Department of Energy's National Renewable Energy Laboratories(NREL) is to begin work testing a catalyst developed by Dow Chemical(DOW), the industrial giant based in Midland, MI, to see if it can be used to massively boost the production of ethanol made from biomass. The partnership will attempt ways to make ethanol biofuel from cellulosic biomass, such as waste from corn or wood, using thermochemical processes. If successful, a catalytic process could theoretically achieve production rates of 130 gallons of alcohol per ton of biomass, a significant improvement on the 60-to-80-gallon yields produced by existing biochemical fermentation plants, says Mark Jones, a technology strategy development scientist with Dow.

USA Today.com:
- Republican presidential candidate John McCain moved from being behind by 6 points among "likely" voters a month ago to a 4-point lead over Democrat Barack Obama among that group in the latest USA TODAY/Gallup Poll. The Friday-Sunday poll, mostly conducted as Obama was returning from his much-publicized overseas trip and released just this hour, shows McCain now ahead 49%-45% among voters that Gallup believes are most likely to go to the polls in November.

Lloyd’s List:
- Prospects of a fullscale container shipping slump worsened today as new figures showed that cargo volumes from Asia to northern Europe actually contracted in June as several major economies headed towards recession. Last month’s decline was the first recorded since 2001 when the industry hit rockbottom, with both freight and charter rates collapsing. Container lines have been reporting spot ocean rates of around $650 a teu, less than half the prices prevailing a year earlier when this trade corridor was booming. The problems piling up are being compounded by the huge schedule of newbuilding deliveries, with all the very largest ships on order earmarked for the Asia-Europe trades.

Portland Business Journal:
- The Oregon Energy Facility Siting Council gave its approval of the site of a wind farm billed to be the largest in the world. The Shepherd's Flat Wind Farm, which would span Gilliam and Morrow counties in north-central Oregon, is proposed to have 303 wind turbines with a peak capacity of 909 megawatts -- instantly doubling the state's current wind-generated capacity of 889 megawatts, making it one of the largest wind farms in the country.

AP:
- An al-Qaeda commander who escaped from a US prison urged Muslims in a video posted on the Internet to kill the king of Saudi Arabia for leading an interfaith conference this month. Abu Yahia al-Libi, who escaped from Afghanistan’s Bagram prison in 2005, said in the video that bringing religions together equated to renouncing Islam. “Equating Islam with other religions is a betrayal of Islam,” al-Libi said. He called for “the speedy killing of this tyrant.”

Reuters:
- About 13 percent of banks placed on a regulatory watch list historically have failed, the head of the U.S. Federal Deposit Insurance Corp said on Monday. Bair said she would be surprised if she saw another bank failure like IndyMac, or larger.
- The Financial Accounting Standards Board, under pressure from lawmakers, will reconsider its timeline for a controversial rule change that may force banks to bring trillions of dollars in off-balance sheet assets onto their books at its Wednesday meeting. FASB, which sets U.S. accounting rules, will reconsider the rule's effective date and transition provisions, according to a schedule posted on its website.

Financial Times:
- The New York Stock Exchange is responding to the sharp rise in algorithmic trading by introducing technology designed to give NYSE floor brokers the ability to trade algorithmically and more easily locate large sources of liquidity.
- Two prominent international campaign groups on Monday accused Beijing of failing to meet promises it made on human rights and the environment when it won the bidding to host the 2008 Olympic Games.
- Oil innovation after years of caution. Using Bright Water could raise the amount of oil that can be recovered from a field by up to 35 per cent.

CBC:
- Canada's housing market slumped considerably in the first six months of 2008, said the Canadian Real Estate Association on Monday. The number of residential homes sold across the country sagged by 13 per cent for the January to June period, according to figures released by the organization.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (VECO), target $22.
- Reiterated Buy on (AXL), target $11.
- Reiterated Buy on (VZ), target $42.

Night Trading
Asian Indices are -2.75% to -.50% on average.
S&P 500 futures -.04%.
NASDAQ 100 futures -.21%.

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Earnings of Note
Company/EPS Estimate
- (CL)/.94
- (ETR)/1.50
- (MAS)/.19
- (MHP)/.67
- (NOC)/1.40
- (NOV)/1.13
- (X)/3.82
- (ANR)/.53
- (AG)/.97
- (MSO)/.03
- (BEAV)/.57
- (COH)/.50
- (LEA)/.70
- (NCR)/.35
- (JAH)/.64
- (UA)/.00
- (CEPH)/1.08
- (VIA/B)/.58
- (CBG)/.41
- (ADVS)/1.0
- (LRCX)/.39
- (OMX)/.17
- (CTX)/-1.35
- (OSG)/2.76
- (ERTS)/-.33
- (MET)/1.51
- (GNW)/.56
- (BWLD)/.27

Upcoming Splits
- (ARTW) 2-for-1

Economic Releases
10:00 am EST
- Consumer Confidence for July is estimated to fall to 50.1 versus a reading of 50.4 in June.

Other Potential Market Movers
- The S&P/CaseShiller Home Price Index, weekly retail sales reports, Keefe Bruyette & Woods Community Bank Investor Conference, (BEC) investor meeting, (GCO) analyst event and (IRIS) financial analyst reception could also impact trading today.

BOTTOM LINE: Asian indices are sharply lower, weighed down by automaker and financial shares in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.

Stocks Finish at Session Lows, Weighed Down by Airline, Financial, Homebuilding and Insurance Shares

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In Play

Stocks Lower into Final Hour on Financial Sector Concerns, Rise in Oil, Profit-Taking, More Shorting

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Computer longs, Biotech longs and Internet longs. I added (IWM)/(QQQQ) hedges and added to my (EEM) short today, thus leaving the Portfolio 75% net long. The tone of the market is negative as the advance/decline line is substantially lower, most sectors are negative and volume is below average. Investor anxiety is slightly above average. Today’s overall market action is bearish. The VIX is rising 5.11% and is still above-average at 24.08. The ISE Sentiment Index is low at 115.0 and the total put/call is above average at 1.05. Finally, the NYSE Arms has been running above average most of the day and is currently 1.22. The Euro Financial Sector Credit Default Swap Index is falling 1.12% today to 78.76 basis points. This index is up from a low of 52.66 on May 5^th, but down from 129.46 basis points on March 20^th. The North American Investment Grade Credit Default Swap Index is +.23% today to 135.40 basis points. The TED spread is rising 3.16% to 1.11. Given recent reports, I suspect much of today’s action is a result of the many hedge funds that are having a very hard time this month, cutting risk across the board. One of my long-held longs, (ISRG), is down 3.8% today after a “negative” article in Barron’s over the weekend. I strongly disagree with the main premise of the article that the future growth of the company is being overestimated. In my opinion, new procedure and overseas long-term growth opportunities are still meaningfully underestimated. I plan to add to this long position on any significant decline in the share price from current levels. Nikkei futures indicate a -90 open in Japan and DAX futures indicate an +5 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering and bargain-hunting.

Today's Headlines

Bloomberg:
- CNA Financial Corp.(CNA) is buying more securities backed by subprime debts and said it’s made an 8% return on the riskiest home-loan holdings purchased this year. Loews CEO Jim Tisch affirmed in April the insurer’s strategy of looking for mortgage assets after the collapse of the subprime market.
- Start Drilling Now to Lower Oil, Gasoline Prices.
- Russian stocks fell, sending the Micex Index to the lowest since 2006, after Interfax reported Prime Minister Vladimir Putin said OAO Mechel avoided taxes, stoking concern commodity producers not controlled by the government may face increased scrutiny. Mechel, the coal and steelmaker controlled by billionaire Igor Zyuzin, plummeted 34 percent. OAO GMK Norilsk Nickel, the nation's largest mining company, slumped the most in six months. OAO Lukoil, Russia's second-biggest oil company, also declined. The ruble-denominated Micex lost 2.1 percent to 1,456.16, after earlier rallying as much as 1.9 percent. The dollar- denominated RTS Index sank 1.2 percent to 1,928.74, its lowest since February.
- Russia may increase grain output by as much as 16% in the marketing year that started in June because of higher yields and increased planting, WJ Group said. The average yield will probably rise 4% to 4.63 tons a hectare(2.47 acres), according to Petrichenko. The wheat harvest may rise 16% to 57.4 million tons, he said.
- Consumer confidence in Germany, Europe's biggest economy, dropped to the lowest in more than five years as soaring energy prices sapped purchasing power and the economic outlook deteriorated.
- The US dollar should prove to be more reliable. It will be buoyed by improving U.S. trade, receding oil prices, a narrower interest-rate gap between the U.S. and Europe, and the detrimental global effects of a slowing American economy.
- Beijing may bar more cars from its roads and shutter more factories to lift a blanket of smog that continues to envelop the city 11 days before the Olympics begin. The lack of wind and heavy rain over the past two weeks has caused a steady buildup of dust and dirt particles, pushing the air pollution index to twice the maximum level recommended by the World Health Organization for four straight days. An emergency plan may be announced ``soon,'' the English-language daily said, citing Li Xin, an engineer with the environmental protection bureau, who helped draw up the measures. As many as 25 percent of Olympic athletes suffer from asthma, which causes airways to swell and produce mucus, reducing oxygen supplies to straining muscles. The International Olympic Committee has said it will reschedule events next month if athletes' health is at risk.
- Hedge funds may post their worst month in at least five years after bets on financial stocks and crude oil backfired. Hedge Fund Research Inc.'s Global Hedge Fund Index of more than 55 funds slid 3.2 percent through July 24, heading for the biggest monthly drop since the measure started in 2003. Wagers on a decline in financial stocks and homebuilders, one of the most popular, soured after Fannie Mae and Freddie Mac shares more than doubled in the six trading days to July 23. Bullish bets on crude oil turned to a loss as oil slid 15 percent from a record $145.29 a barrel on July 3 after doubling in a year. Short selling of Fannie Mae and Freddie Mac jumped in the first two weeks of July as the stocks fell on concern that shareholders would be wiped out even if the government bailed out the entities. Instead, the shares doubled in six trading days, catching out investors who shorted the stock, selling borrowed shares in anticipation of buying them back at a cheaper price.
- Wachovia Corp.(WB) may sell its mutual funds, the securities brokerage or Northeast and Texas branches as Chief Executive Officer Robert Steel copes with fallout from a record $8.9 billion quarterly loss, according to analysts.
- President George W. Bush said Pakistan has made a ``strong commitment'' to control the terrorist threat from its region bordering Afghanistan, an area of increasing concern to U.S. military officials.
- New lows among US stocks exceeded new highs this month by the widest margin in a decade, and the extreme reading points to rising share prices. Schaeffer’s Investment Research drew this conclusion from a study of its new-lows ratio. The indicator “has reached peak pessimism and has begun to roll over,” Robert Becks, a senior financial market analyst at the Cincinnati-based firm, wrote. Within the past three weeks, the new-lows ratio surpassed 90% and reached its highest level since the second half of 1998, when Russian defaulted on its debt and the Long Term Capital Management LP hedge fund collapsed. “An obvious caveat here is that this indicator generates very few signals,” he wrote. The report cites eight instances since 1990 when the ratio rose above 85%. After each of the first five, the S&P 500 gained more than 10% in the next 12 months. The other three occurred in January, March and July of this year. This month’s reading heralds “an increasingly positive market” when combined with the weekly Investors Intelligence survey of newsletter writers and other barometers of sentiment, Becks wrote.
- Freddie Mac(FRE), the second-largest U.S. mortgage-finance company, sold $2 billion of short-term notes in a weekly auction at lower rates than in a sale last week.

Wall Street Journal:
- The Securities and Exchange Commission is focusing on four rumors that circulated about Wall Street firm Lehman Brothers Holdings Inc.(LEH) in recent weeks, as the commission's investigation into potential market manipulation heats up. In subpoenas recently sent to dozens of hedge funds and others, the SEC asks the investment funds for transcripts of phone calls, messages and payroll documents that mention or include the Federal Reserve's lending facility, Barclays PLC, hedge fund SAC Capital Advisors and bond-fund house Pacific Investment Management Co., or Pimco, according to people familiar with the matter. Beyond the investigation into the trading of Lehman and Bear Stearns shares, the SEC also announced it was conducting "sweep" examinations of hedge funds' and brokerage firms' internal compliance systems to try to tamp down the spreading of rumors.

NY Times:
- In Volatile Times, Investors Tune in All and Any Predictions. The result has been a flood of brash pronouncements, as the Cassandras of the financial set try to outdo themselves with increasingly outlandish predictions. So far, many of these forecasts, whether computer-crunched numbers or seat-of-the-pants guesstimates, have turned out to be wrong. But investors still seem to hang on to Wall Street’s every word.
- Cable television subscribers in NYC will have another company to choose from starting on Monday when Verizon(VZ) begins selling programming, taking on companies like Cablevision and Time Warner Cable.

CNBC.com:
- Iranian President Mahmoud Ahmadinejad told NBC News that Iran isn’t developing nuclear weapons. “We are not working to manufacture a bomb,” NBC’s Brian Williams quoted Ahmadinejad as saying following an interview with the president in Tehran.

Boston Globe:
- In fiscal 2008, according to numbers to be released today by the Massachusetts Bay Transportation Authority, nearly 375 million people took public transportation, 21 million more riders than the state agency had in fiscal 2007, a 6 percent leap and the highest ridership total in the agency's 44-year history.

OCRegister:
- Depression? Not hardly. The current slowdown is still a long way from the recessions of the early 1980s, let alone the 1930s. You hear the word repeatedly. Are we in a depression? If not, are we headed for one? The answer to the first is "no"; and the answer to the second is "almost certainly not." The use of "depression" to describe the economy is a case of rhetorical overkill that speaks volumes about today's widespread pessimism and anxiety. During the depression, U.S. unemployment peaked at 25 percent in 1933. During the harsh recession of 1981-1982, unemployment peaked at 10.8 percent in late 1982. In June of this year, unemployment was 5.5 percent, slightly below the average since 1960 of 5.8 percent. Corporate profits are still running at a near-record annual rate of $1.5 trillion. Output in the first quarter of 2008 was actually 2.5 percent higher than a year earlier.

Business Week:
- Michael Dell Predicts ‘Big Second Half’. Soaring sales overseas, a US retail blitz, and product overhauls are fueling the PC maker’s revival, its founder says.

FINalternatives:
- Hedge fund launches in Europe fell 45% to a six-year low in the first half, according to a new report.

Mediaweek:
- The five largest US broadcast networks drew 1.2 million more viewers each night this summer than a year ago after the writers’ strike hurt ratings in April and May, citing Nielsen Media Research data.

Interfax:
- Russia has about $50 billion of its currency reserves invested in Fannie Mae(FNM) and Freddie Mac(FRE) bonds, citing Alexei Ulyukayev, first deputy central bank chairman. Separately, Ulyukayev said inflation in 2008 may be between 10.5% and 11%.

Valor Economico:
- Archer Daniels Midland Co.(ADM) plans to invest in two Grupo Cabrera ethanol mills in Brazil. The projects are expected to cost $253.5 million each and crush 3 million tons to 4 million tons of sugar cane into ethanol. The first unit is expected to start production in 2010.

Vedomosti:
- Rising jet fuel costs may bankrupt some Russian airlines, citing Yevgeny Bachurin, the head of Russia’s Federal Air Transport Agency. The total number of airlines in the country may be halved, citing VTB Group analyst Elena Sakhnova.

Haaretz:
- Syria envoy to US: Israel has chance for peace with all Arabs.

Bear Radar

Style Underperformer:

Small-cap Value -1.32%

Sector Underperformers:

Airlines irlind (-3.66%), I-Banks (-2.70%) and Steel (-2.10%)

Stocks Falling on Unusual Volume:

MTL, IRE, AIB, EQIX, SCRX, GEHL, RYAAY, VLCM, LNCE, VRAD, PROS, NIHD, MSA, TDY, CHE, RC, CGX, CPY and BVF

Stocks With Unusual Put Option Activity:

1) DHI 2) COH 3) AMGN 4) HOT 5) MTL