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From Briefing.com: Close Dow -94.37 at 10441.11, S&P -12.23 at 1214.47, Nasdaq -16.07 at 2139.36: After spending the majority of the session vacillating within a rigid range just above the unchanged mark, the major indices took a late-afternoon turn for the worse and closed at their lows of the day as more hawkish Fed policy talk expunged early buying efforts. While sharp price declines across the energy complex had been the market's source of support, sell-offs in crude, gasoline, and natural gas became overlooked after Dallas Fed President Richard Fisher said (around 1:30 ET) that inflation shows "little inclination" to decline and stands near the "upper end" of the Fed's tolerance zone - commentary that sent what few buyers had stuck around after lunch heading for the exits. The market, which stands increasingly, and understandably, nervous ahead of the impending Q3 season, subsequently lacked leadership across the board...
Spending the entire session as the day's largest laggard and exerting the weightiest pressure on the market was the Energy sector, finishing with a loss in excess of 3%. Along with profit-locking that the aforementioned price declines catalyzed, news that BP plc (BP 68.80 -1.80) will not meet FY05 production targets and will see a $700 mln Katrina and Rita-related profit shortfall sent further tremors through the sector...

Next in line came Utilities, off 1.4% on wide-spread consolidation efforts, but it was the coupled effect of respective 1.1% and 1.2% declines from the more influential Financial and Technology sectors that sent the market plunging. While the Financial sector's performance was similarly a result of broad-based weakness, Technology's anguish was rooted in hardware's 3.4% dive. Lexmark's (LXK 43.50 -17.44) pre-bell profit warning - by which the company slashed its Q3 earnings outlook by 50%, citing a sales shortfall - eclipsed Goldman Sachs' upgrade of the hardware group... An analyst downgrade on Texas Instruments (TXN 32.04 -1.84) made tech matters even worse, sending chip stocks down 1.1%...

Although the Consumer Discretionary (-0.8%) sector managed to chalk a modest gain earlier in the session, largely due to energy prices' effects on discretionary issues at large, it too dove underwater when retailers (-0.8%) relinquished their gains and paired with languishing homebuilders - off 3.3% after traders digested a New York Times article that discussed a slowing housing market and highlighted record levels of insider selling within the space. Consumer Staples, while on negative turf, finished as the best-of-the-worst, demonstrating relative strength on the back of Walgreen Co.'s (WAG 44.15 +0.96) upbeat same store sales report (+7.7%). The drug retailer's 2.5% gain helped offset declines in Procter & Gamble (PG 58.12 -1.19), suffering Citigroup's downgrade, and in Clorox (CLX 53.76 -0.82), which lowered its Q2 (Dec) and FY06 earnings outlooks...

On the flip-side, Healthcare represented the day's single bright spot. While late-day selling pressure seeped in there as well, the sector clung to a 0.7% gain that left it alone above the flat line... Strength in HMOs, medical equipment, biotech, and pharmaceuticals were some of the market's strongest areas, but it was Abbott Labs (ABT 44.01 +1.53) that led the day after announcing that the FDA approved marketing of its rheumatoid arthritis drug Humira for first-line treatment. A subsequent analyst upgrade made for further upside...

Separately, the day's sole piece of economic news was the Aug. factory orders report. Although the read checked in at a stronger than expected +2.5% (consensus +2.0%), the pre-Katrina data was largely overlooked by the equity market... Treasuries, however, took a bit of a bid and closed the 10-year (+03/32) at a 4.37% yield... All in all, though, with Friday's employment data looming and on account of Katrina-related worries coupled with pre-earnings season caution, buyers, ultimately, had little reason to leave the sidelines today...DJTA -1.09, DJUA -1.93, DOT -1.36, Nasdaq 100 -0.63, Russell 2000 -0.98, SOX -1.09, S&P Midcap 400 -1.04, XOI -3.27, NYSE Adv/Dec 1109/2155, Nasdaq Adv/Dec 1159/1859

Amkor Technology (AMKR) said that it has completed the sale of the assets of its Amkor Test Services business unit to several members of the ATS management team for an undisclosed sum... Amtech Systems (ASYS) announces two new orders for its Tempress brand diffusion furnaces totaling $1.2 mln.

7:36AM White Elec Designs awarded military orders aggregating $3.6 mln (WEDC) 4.96 :Co announces receipt of two military orders aggregating approx $3.6 mln. The co was awarded a $2.6 mln contract from an intl customer to provide multi-chip modules for fire control systems in armored ground vehicles. The co was also awarded a $1 mln contract from a domestic military customer for "system-in-a-package" components for fighter jets.

3:05PM The Activist Approach
Wealthy investors and hedge funds have taken on a more activist role recently in pressuring companies to bend to their will. Today, a New York-based hedge fund, Atticus Capital, boosted its stake in Phelps Dodge (PD), one of the world's largest copper miners. The fund demanded the mining company use its $2.5 bln in cash to buy back shares. In a letter filed with US regulators, Atticus Chief Executive Officer Timothy R. Barakett said to Phelp's CEO J. Steven Whisler that a multibillion-dollar share buyback "offers returns on equity superior to most capital expenditures." The fund is now the second largest shareholder in Phelps Dodge accumulating an 8.6% stake.

The announcement sent shares of PD up almost six percent to $138.63 - a historic high. Earlier this year, the $8 bln fund blocked Deutsche Boerse AG's bid for London Exchange Plc. As copper and molybdenum prices have soared over the last two years, so too has Phelps's earnings and cash flows. The mining industry is a highly capital intensive and a highly cyclical business. As such, producers typically redeploy cash back into operations to improve operational efficiencies and raise production in the bull times in anticipation of the bear times. Phelps has stated in the past that it's planning for the longer-term, securing several new production projects, which will drive growth into 2007-2008 and beyond.

We recommended Phelps as a suggested holding for active investors back in March 2004, on the back on compelling copper fundamentals in anticipation of the earnings and cash flow escalation. As expected, Phelps used the windfall from record commodity prices to reduce debt by $1.26 bln and to restructure its balance sheet. Last year, the company announced its first common stock dividend since 2001, spending $47.5 mln on the payout. In June PD doubled the dividend; the dividend yield now stands at 1.1%.

Profits tripled in the second quarter to a record, as Phelps ended the first half with $2.6 bln on the books. We certainly would agree that Phelps, with almost $28 per share in cash on hand, could support a higher payout or initiate a stock buyback. Other mining companies have done the same, including Freeport McMoRan (FCX), which has paid $500 mln in early debt retirement and has spent $313 mln in dividends and $80 mln on buybacks. PD is unlikely to use the cash for acquisitions, after being burned due to falling prices in the last cycle. We are likely to gain more insight on just what the company plans to do with all this cash on the conference call it will hold on October 27th following its third quarter results.

Kirk Kerkorian's purchase of General Motors (GM) shares is another example of an activist investor. Kerkorian is now asking for a seat on the board and is using his position to exert significant pressure on GM's board and its CEO Rick Wagoner to enact change. At this point GM should welcome any fresh thinking as all the US automakers remain on the brink. The announcement of Kerkorian's purchase sent GM's shares on a tear in anticipation of improved expectations both for the near and long-term.

The other big name in the activist investor group is Carl Ichan, of the Icahn Group. He recently set his sights on Time Warner (TWX), proposing a list of actions that it feels will narrow the gap between its share price and the value of its assets. The list of demands includes spinning off of Time Warner Cable and initiating a Dutch auction (where investors name the price) tender process for $20 bln of TWX shares. Richard Parsons, Time Warner's CEO, met with Icahn and said he is reviewing options to increase shareholder value, including Icahn's. After languishing for years, shares have risen 10% since the rumors began over Icahn's possible investment in the company. Ichan previously threatened a proxy fight over Mylan Labs's proposed acquisition of King Pharmaceutical, which was eventually dropped.

We wouldn't be surprised if the energy sector also starts receiving similar calls from investors, as their cash windfalls rival those of the mining companies. ---Kimberly DuBord, Briefing.com

2:50PM Lennar Corp. (LEN)

60.12 -1.58: After the close Monday, Lennar Corp. was effectively added to the S&P 500 index - widely regarded as a proxy for the U.S. equities market - making it the fifth home building stock to be included. Other companies in that group include Centex (CTX), DR Horton (DHI), KB Home (KBH), and Pulte Homes (PHM).

The inclusion of Lennar, announced late Friday, comes in the place of Gillette, which was acquired by Procter & Gamble (PG) on Saturday in a $57 billion deal. While many investors and analysts had expected Web search company Google (GOOG) to replace Gillette, the S&P Index Committee - comprised of a team of economists and analysts at Standard & Poor's - instead chose Lennar. In addition, the committee said that Chevron Corp. (CVX) will replace Gillette in the S&P 100, while homebuilder Beazer Homes (BZH) will replace Lennar in the S&P MidCap 400, effective on October 3.

The S&P 500, which represents the U.S. component of the S&P Global 1200, is an index of 500 stocks selected for market size, liquidity, and industry group representation, along with other factors. It is widely viewed as a leading market indicator, and reflects the risk/return characteristics of the large-cap segment. As such, the index is used as a basis for portfolio construction by many mutual funds. The addition of a stock, subsequently, creates an "index effect," whereby fund managers add the stock to their portfolios to replicate the index and the market. This in turn accounts for a greater amount of stock purchasing. According to Standard & Poor's, there is more than $1 trillion currently indexed to the S&P 500.

Correspondingly, shares in Lennar rose more than 3% on Monday following the announcement of the company's inclusion in the index.. Meanwhile, shares have been extremely volatile in recent months, falling most heavily in August, amid increasing concern about a slowdown in the once-booming housing market. Even as homebuilders continue to report solid growth, worries over rising mortgage rates and surging energy costs have darkened expectations for what has been one of the market's best performing sectors over the past few years. Furthermore, fading consumer confidence has helped drive shares lower from their July highs.

In spite of the Fed's steady rate hikes and lower-than-expected August new home sales, however, the current housing market continues to be supported by historically low interest rates and strong demand. Although the market is likely to cool as rates remain on the rise, it continues to be Briefing.com's view that mortgage rates would have to approach the mid/upper 6% level to significantly constrain the still hearty housing market. Therefore, as market conditions remain favorable and homebuilders continue to generate solid fundamentals, Lennar maintains an attractive growth profile. Lennar's shares are currently trading at 7.4x forward earnings with a PEG ratio of 0.49 - an appealing valuation against its peers, as well as the broader market. --Richard Jahnke, Briefing.com

11:11AM Clorox (CLX)

53.87 -0.71: Consumer products maker Clorox Co. on Tuesday lowered its profit outlook for the second quarter and fiscal year, due to rising energy costs and the combined impact of Hurricanes Katrina and Rita. In addition, the company - whose products include Glad trash bags, Kingsford charcoal briquettes, and its namesake bleach - upheld its guidance for the first quarter, citing higher than expected sales.

"In an already high-cost environment, the recent storms have further intensified costs for raw materials, transportation and utilities in our manufacturing operations," said Jerry Johnston, Clorox's Chairman and CEO. As a result, the company said earnings for the current quarter (Q2) are expected to be in the range of $0.41 to $0.47 per share - compared with its previous guidance of $0.50 to $0.57 per share - with sales growth of 1% to 3%. The revised forecast reflects the impact of anticipated commodity cost increases, which have been exacerbated by hurricane-related supply disruptions. Furthermore, the company said the forecast reflects charges and a preceding decline in shipments associated with a Kingsford charcoal product improvement being launched in January. On average, analysts had foreseen profits of $0.55 per share during the second quarter.

Looking to FY06, Clorox anticipates earnings between $2.91 and $3.06 per share on sales growth of 3% to 5%. Although the top-line estimate is consistent with its previously communicated range, the updated earnings forecast is down from $3.00 to $3.11 per share, reflecting greater uncertainty in the current cost environment as well as the residual impact of the recent hurricanes. The consensus EPS estimate is for $3.06.

While a number of cost savings programs are being implemented, "the earnings benefit of many of the actions the company is taking to help offset the impact of recently rising raw-material and energy-related costs will not begin to be realized until the third quarter," said the company. As such, the challenging cost environment is expected to negatively impact near-term results. However, the company continues to make strides with cost savings, which still have plenty of room for improvements, and should be reflected in greater long-term opportunities.

Nonetheless, while Clorox continues to make progress with its current strategy, using product innovation to drive top-line growth, combined with myriad cost saving initiatives, rising raw material pressures continue to impede more meaningful upside. Consequently, shares have been pushed down significantly in the face of considerable earnings risk and a harsh raw material environment. The stock is down approximately 6% year-to-date, and about 18% lower from its 52-week high of $66.04 in April. Given the revised cautious outlook, worsened by the disruption of raw material supplies, namely resin - a petroleum by-product - caused by the impact of Hurricanes Katrina and Rita, it is difficult to get excited about the near-term prospects of the stock. At the current price level, shares are trading at approximately 17.6x forward earnings compared to its 5-year average of 20.9x. --Richard Jahnke, Briefing.com

10:58AM Lexmark Intl. (LXK)

45.51 -15.43: The operating environment for Lexmark continues to worsen as an intensely competitive environment, coupled with weak end-user demand weighs on sales and profits. The second largest printer manufacturer slashed its third quarter guidance, having taken a hit from lower supply sales and aggressive pricing from rival Hewlett Packard. Lexmark expects these negative factors to continue to impact earnings in the fourth quarter as well. The market responded in kind, but certainly not kindly, to the magnitude of the revision, taking shares down almost fifteen dollars.

Lexmark currently had a market cap of $7.2 bln, but a significant portion of that cap has been cut today, leaving LXK vulnerable to re-testing recent lows below $40. The stock has followed a downward trajectory since reaching a high of $97.50 in July 2004. The lowest point over the last five years dated back to October 2000, when the stock traded below $30 per share.

The Lexington, Kentucky-based company slashed its third quarter profit guidance to $0.40-0.50 per share, down from its prior estimates of $0.95-1.05 per share. The new guidance is less than half of what the market had been expecting of $1.02 per share. The guidance excludes the approximately $0.05 per share third quarter impact of the previously announced workforce reduction. The main culprit of the shortfall was lower laser and inkjet supplies revenues due to a reduction in channel inventories and weak end-market demand. Pricing was also an issue with laser and inkjet printer revenue coming in short, resulting from aggressive product pricing, increased promotion, and again weak demand. There is a ripple effect at work here. When Lexmark lower prices below cost, it doesn't just factor into the products it sells, but it also takes a write-down on its entire inventory.

During today's conference call, management did not have a lot of answers for the main causes for the shortfall. They were able to determine if these issues were linked and confessed they were completely caught off guard with regard to the channel inventory issue. On the demand side, LXK cited poor sales of branded units and a product mix as sales shifted toward OEM printers which are sold at a discount, as possible explanations for the weakness. The bigger question is whether this is short-term trend with regard to the tightening of the channel inventories by its installed base, or a longer-term issue involving a fundamental change in usage patterns.

Speaking to the latter, if the usage life of a printer become less, this will cause a shift in hardware and supplies. Producers forecast supply annuities from each printer, but if those sales levels come down it would have to adjust the price of the hardware accordingly. The supply business has historically been a key profit generator, as ink cartridges carry a hefty margin. Recently there has been a shift to lower-price cartridges that has cut profit margins this year and has magnified the continued pricing pressures on the hardware side of its business. Gross margins sunk to 34.6% in Q2 from 35.3%. If the life of the printer shrinks, producers will get squeezed from both ends as intense competition already limits hardware pricing.

This disastrous performance will likely continue into the fourth quarter. The company didn't quantify its downtrodden expectations, but estimates the same factors to come into play. LXK said it expects Q4 revenue and profits to be "significantly below the current average of analysts expectations," which is $1.17. It will release Q4 guidance during its next earnings release on October 25th.

While Lexmark's issues are somewhat company specific, we think growth-minded investors should steer clear of the printer industry. Slowing top line growth and intense competition will force manufacturers to choose between market share and margins. Producers will need to squeeze costs and drive product quality, as is the case with Hewlett-Packard, in order to drive growth. We expect the news from Lexmark will get much worse before it gets better in the quarters ahead. As such, due to the uncertainty of earnings, we would caution bargain-hunters out there. ---Kimberly DuBord, Briefing.com

9:34AM Page One - Outlook Improves Daily

Stock futures suggested that a slightly higher open was likely.

Oil prices are down $0.65 to $64.80 a barrel. That was the major reason for the upbeat tone.

There is not much corporate news again this morning. Chesapeake Energy will acquire Columbia Natural Resources LLC for $2.2 billion in cash.

The fears about Katrina's impact on the economy persist. The bond market sold off yesterday on concerns that it will lead to inflation. Yet, there is still no hard data that reflect any major changes in trend.

So far, Wal-Mart has said September sales were fine, and the September ISM manufacturing survey was very strong. The prices paid component was up, but that is not at all surprising given what energy costs did that month. In terms of core inflation, all we still have is that core PPI and core CPI prior to Katrina were both running at a mere 1% annual rate in the four months prior to the hurricanes.

The fears are still nothing more than that. The market is understandably nervous, but with each passing day that the data show the US economy continuing on and with energy prices holding steady as refinery capacity returns, the burden is on the bears to show that the economy has in fact been slowed to any significant degree or that there has been any significant inflationary pressures.

Consumer spending will unquestionably take a hit with higher energy prices this winter, but that will take at most 1/2% off GDP growth. Booming business investment will keep GDP growth above long-term trend. Profit growth is well above long-term trends. Interest rates are at very low levels compared to historical trends.

All the negative talk in recent days is still no more than talk. Wise investors will stay above the fray of the fashionable pessimism and look to the long-term opportunities. -- Dick Green, Briefing.com

9:18AM Sunoco Logistics (SXL) KeyBanc Capital Mkts / McDonald upgrades Hold to BUY. Firm says the co has recently traded at a slight discount to their peer group of energy master limited partnerships. They believe the partnership continues upon an acquisition agenda that diversifies its core cash flows away from reliance upon its significant General Partner.
9:18AM Banc Corp (TBNC) Stanford Research initiates BUY. Target $13. Firm believes there is an opportunity to significantly improve the franchise value of the co through improved profitability and enhanced growth, although such improvement will require considerable effort from mgmt and much patience on the part of investors. Assuming a 15.0x multiple on the embedded earning power of the co's balance sheet, they believe that mgmt has the potential to unlock an additional $7.00 to $8.00 per share of embedded value for shareholders over the next few years.

9:17AM Highland Hospitality (HIH) Bear Stearns initiates OUTPERFORM. Target $12.5. Based on: 1) stabilized base of upscale full-service hotels with strong current yields; 2) repositioning efforts, which provide significant earnings upside; 3) robust development pipeline; and 4) attractive dividend yield with growth potential. Firm views the recent pullback in the co's stock from August highs as a buying opportunity.

9:17AM Burlington Res (BR) JP Morgan downgrades Overweight to NEUTRAL. Firm says the co's asset intensity has fallen out of the upper quartile on their 2006 numbers, and seems likely to slip into the lower half of the peer group by 2007, lacking a critical new growth catalyst. At this point, they think the shares are now valued at parity with peer medians based on their 2006 and 2007 EBITDAX ests, as well as on their normalized asset value ests for 2005 and 2006.

9:15AM Air Tran Holdings (AAI) Bear Stearns upgrades Peer Perform to OUTPERFORM. With Northwest (84% overlap, including connections) cutting 10% of domestic capacity, US Airways (86% overlap) cutting an estimated 5%, FLYI (30% overlap) shrinking at least 35%, Delta (96% overlap) trimming 15-20%, and Southwest raising fares so as to meet a 2006 EPS growth target of 15%, firm believes the co is in a unique position to drive unit rev growth.

9:12AM Jacobs (JEC) Friedman Billings downgrades Outperform to MKT PERFORM. Firm says given that there has been no co-specific catalyst that they believe could have been the cause of the sharp move, they must come to the conclusion that the increase is based mostly on investors enthusiasm for companies that are/will/could benefit from Hurricanes Katrina and Rita.

9:12AM PACCAR (PCAR) Morgan Stanley initiates OVERWEIGHT. Target $80. Firm thinks the co is the best house in the truck manufacturing neighborhood, noting that the stock has underperformed on fears over a 2007 truck downturn, but their outlook for 2007 is less dire than consensus, and ests for 2006 and 2007 could rise.

9:11AM Steak n Shake (SNS) KeyBanc Capital Mkts / McDonald downgrades Buy to HOLD. Firm believes higher energy costs are taking a particularly heavy toll on the co's units given their significant expsoure to the Midwest/Southeast. Based on data points from competitors and anecdotal information from other Midwest operators, firm believes sales could be impacted greater than their anticipated SSS drop of -1% for 4Q05.