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Tuesday Watch

Late-Night Headlines
Bloomberg:
- Central banks worldwide must work together in cutting interest rates to help their economies recover from a global recession, fund manager Barton Biggs said. ``Short-term rates are too high around the world, but particularly in the U.S. and Europe,'' Biggs said in an interview on Bloomberg Television. ``A synchronized rate cut would make sense'' and be a ``big help.'' Biggs said he is buying ``high quality'' U.S. stocks that he didn't name. ``You buy into this thing on a gradual, steady basis,'' he said. ``You certainly don't sell on panic here.''

- Australian stocks rallied after the nation's central bank cut its benchmark interest rate by one percentage point, the biggest reduction since 1992.

- The Federal Reserve may have cut borrowing costs today without actually saying so. The central bank used authority granted under last week's financial-rescue legislation to effectively set a floor under its main interest rate that's lower than the 2 percent target set by policy makers last month. The Fed may now pay interest on bank reserves while it floods financial markets with liquidity, pushing down the overnight lending rate by about 0.75 percentage point to 1.25 percent. ``Absolutely, it's a stealth easing,'' said John Ryding, founder and chief economist of RDQ Economics LLC in New York and a former Fed researcher.

- Copper, zinc and aluminum plunged by the exchange-imposed daily limit for a second day in Shanghai. Copper on the London Metal Exchange tumbled as much as 9.1 percent yesterday, and futures in New York slumped as much as 13 percent on concern the deepening credit crisis will stifle global growth and reduce metals demand.

- The cost of protecting investors from Australian corporate bond defaults increased to a record on concern the U.S. government's bank rescue package won't do enough to unlock global money markets as the credit crisis spreads. ``Credit markets remain extremely weak and fragile around the globe, with the developments in Europe the major contributor for the recent weakness,'' Gus Medeiros, a credit analyst at Deutsche Bank AG in Sydney, wrote in a research note today. The Markit iTraxx Australia index rose 34 basis points to 245 at 8:39 a.m. in Sydney, according to prices from Citigroup Inc. The price of the contracts, tied to the debt of 25 companies including Qantas Airways Ltd. and BHP Billiton Ltd., is the highest since the iTraxx benchmarks started in 2004.

- Advanced Micro Devices Inc.(AMD), the money-losing chipmaker struggling to compete with Intel Corp.(INTC), will spin off its manufacturing plants as part of an $8.4 billion investment from the Abu Dhabi government.

- Bank of America Corp.(BAC), the bank that bought Countrywide Financial Corp., halved its dividend and plans to sell $10 billion in common shares after third-quarter profit fell 68 percent. The stock declined 10.3% in late trading.

- UBS AG lowered its price forecasts for copper, aluminum and most bulk commodities amid concern a slowing global economy will dent demand from builders and automakers. Copper will average $2.50 a pound in 2009, down 38% from a previous estimate. Aluminum was cut 28% to $1.15 a pound next year. The bank cut nickel estimates 32% to $7.50 a pound next year. Zinc may average 20% below the previous forecast at 80 cents a pound next year. Iron ore prices may fall 15% in 2009. Coking coal will average $250 a metric ton next year, down 17%, UBS said.

Wall Street Journal:
- Europe Needs A United Approach To the Credit Crunch. Not long ago most European analysts and policy makers viewed the credit crisis as a primarily American problem, with unpleasant but limited spillover to European and other financial markets. European banks like UBS, Northern Rock, Société Générale, IKB, WestLB and several other publicly owned German banks that were hit by the crisis or even collapsed in the course of it were regarded as exceptions that had foolishly exposed themselves to the U.S. subprime market. That view sure has changed.

- After years of putting a strain on world energy supplies, Asia is expected to significantly increase its own oil production next year, a development that could add to downward pressure on prices. The International Energy Agency in Paris expects China, Vietnam, Malaysia and other Asian-Pacific nations to increase production by almost 300,000 barrels of oil a day in 2009, the region's biggest annual increase since at least the 1990s. When contributions from Central Asian nations such as Kazakhstan are added, the total increased production rises to about 500,000 barrels per day, analysts say. Overall, non-OPEC world production is only expected to grow about 760,000 barrels a day in 2009, the IEA says.

MarketWatch.com:
- No capitulation among gold timers at mid-September low.

NY Times:
- European governments pledged Monday to safeguard bank deposits in a bid to stem financial panic, but they stopped short of a coordinated strategy to break the grip of a credit crisis that now threatens to set off a protracted recession across the Continent, sending markets tumbling on both sides of the Atlantic. The lack of orchestration — despite pledges to the contrary from European Union officials Monday and a plea from the head of the International Monetary Fund to step forward with concrete plans — raised the prospect that the European Central Bank would need to help mop up the mess by cutting interest rates, a move hinted at by the E.C.B.’s president, Jean-Claude Trichet, last week.

- As pressure built in the credit markets and stocks spiraled lower around the world on Monday, the Federal Reserve was considering a radical new plan to jump-start the engine of the financial system.

- Emerging markets took one of their biggest collective tumbles in a decade Monday as stock markets from Mexico to Indonesia to Russia were gripped by fears of a collapse of Europe’s banking system and concern that a global recession could drag down the price of commodities, forcing a steep slowdown in emerging-market growth.

CNNMoney.com:
- September was the worst month on record for hedge fund performance, but for one legendary player what's going on in the markets now must seem like its coming straight from the gates of hell. Tontine Associates, a $10 billion Greenwich, Conn.-based fund, told investors on Friday that it expected to show a 2008 loss through Sept. 30 of 65%, according to two people familiar with the fund's performance. Lately, Gendell has wagered on a worldwide economic boom, investing heavily in global energy services and infrastructure companies.

Reuters:

- One top U.S. Federal Reserve official on Monday warned against another interest rate cut to offset the credit crisis, but a second policy-maker who has defied cuts all year said inflation was receding as a concern. "I'm not as worried as I was before that we might, when the financial system was repaired, have ... inflationary pressure," Dallas Federal Reserve President Richard Fisher told a community bankers in Wichita Falls, Texas.

- The U.S. Interior Department will designate within two years protected areas of the Arctic that are considered critical habitat for polar bears and cannot be harmed by oil development as part of a legal settlement with environmental groups on Monday.

Financial Times:
- Several of China's largest steelmakers are expected to cut output by about 20 per cent this month in a bid to support falling steel prices at a time of weakening demand. Steel mills in northern China, including Shougang Steel, Shandong Iron and Steel, Hebei Iron and Steel, and Angang Steel met last week to discuss cuts that could total 20m tonnes, according to the state-run Xinhua news agency. Shares of Angang Steel fell by their 10 per cent daily limit in Shanghai trading in response to the reports of output cuts. "The sharp slowdown in the property market is having a severe impact on Chinese steel producers," she said, noting that the property sector accounted for 38 per cent of steel industry demand. She quoted Xu Lejiang, the Baosteel chairman, as telling a recent industry conference that the era of rapid steel industry growth "will soon be remembered as history". Chinese steel consumption rose 16 per cent in the first half of 2008. Since then, the three main industries that consume steel in China - construction, household appliances and the car industry - have all shown signs of a slowdown, say industry sources.

- Russia's benchmark RTS index suffered its sharpest fall in its 13-year history yesterday as investor jitters intensified over global financial turmoil, falling oil and commodity prices and overleveraged oligarchs at home. The dollar-denominated RTS closed 19.1 per cent down, while the rouble denominated Micex fell 18.7 per cent, in spite of brief trading suspensions on both exchanges in an attempt to minimise the steep falls. The central bank spent an estimated $5bn to prevent the rouble weakening beyond the 30.41 mark against the euro-dollar basket. Weighing heavily on investor sentiment were fears that Russia's richest oligarchs could be dumping shares on the market if they faced margin calls on tens of billions of dollars in loans.

TimesOnline:
- The UK government is considering injecting $69 billion to $87.2 billion of capital into retail banks by buying shares to revive investors confidence. The government may end up with stakes in Barclays Plc, Royal Bank of Scotland Group Plc, Lloyds TSB Group Plc and HBOS Plc in return for so-called preference shares that gives holders more rights than common stockholders.

Daily Telegraph:

- Confederation of British Industry urged the Bank of England to deliver a sharp interest rate cut this week amid warnings from economists that a recession might be deeper and longer than initially thought, citing CBI. CBI want the BOE’s Monetary Policy Committee to bring in a 50-basis-point cut in order to stabilize confidence for markets, businesses and consumers. The committee will make its rate decision Oct. 9.

Korea Economic Daily:

- Hyundai Motor Co. plans to sell plug-in electric cars from 2012, earlier than its initial schedule of 2014 to meet growing demand.

China Daily:

- Property transactions in China's major cities hit a record low over the past National Day holiday as more potential homebuyers adopted a wait-and-see attitude. Statistics from the Beijing Real Estate Transaction website revealed that the average number of daily deals over the holiday week fell 72 percent year-on-year in the capital to 69 units, making it the worst period so far this year for the property sector. Shanghai Autumn Real Estate Expo, regarded as a barometer of the industry, attracted 130,000 visitors from Oct 1 to 4. Although this was the same number as 2006, its transaction volume fell 37 percent over the same period. The situation is equally gloomy in Shenzhen, where a five-day real estate expo was held over the National Day holiday. While 20,000 sq m of property was changing hands every day at the fair in 2006, the daily amount ranged from 4,000 to 9,000 sq m this year. Luo Yuan, general manager of Beijing-based Sunrun Real Estate Agencies, said one of the reasons for the sluggish market was that property prices still remain beyond the reach of many potential buyers.

Folha de S. Paulo:

- Brazil’s government plans to authorize the central bank to buy loan portfolios from commercial banks, in an attempt to help small- and mid-sized banks amid a shortage of credit.

Late Buy/Sell Recommendations
- None of note

Night Trading
Asian Indices are -2.25% to +.50% on average.
S&P 500 futures +1.34%.
NASDAQ 100 futures +1.30%.

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Company/EPS Estimate
- (AA)/.54

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- (TISI)/.24

- (AYI)/1.07

- (SWY)/.47

Economic Releases
2:00 pm EST

- Minutes of Sept. 16 FOMC Meeting

3:00 pm EST

- Consumer Credit for August is estimated to rise to $5.0 billion versus $4.6 billion in July.

Upcoming Splits
- (EBIX) 3-for-1

Other Potential Market Movers
- The weekly retail sales reports, JMP Securities Healthcare Conference, Johnson & Rice Energy Infrastructure Conference, Maxim Group Growth Conference and William Blair Small-cap Growth Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by automaker and commodity stocks in the region. I expect US equities to open modestly higher and to maintain gains into the afternoon. The Portfolio is 75% net long heading into the day.

Stocks Finish Sharply Lower, Weighed Down by Commodity, Construction, Gaming, Homebuilding and Airline Shares

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In Play

Stocks Sharply Lower into Final Hour on Global Growth Worries

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Gaming longs and Medical longs. I took profits in some of my emerging market/commodity shorts, covered some of my (IWM)/(QQQQ) hedges and was stopped out of some of my longs, thus leaving the Portfolio 75% net long. The tone of the market is very negative as the advance/decline line is substantially lower, every sector is falling and volume is heavy. Investor anxiety is very elevated. Today’s overall market action is very bearish. The VIX is rising 20.2% and is historically elevated at 54.69. The ISE Sentiment Index is low at 99.0 and the total put/call is very high at 1.53. Finally, the NYSE Arms has been running very high most of the day, hitting 6.02 at its intraday peak, and is currently 1.69. The Euro Financial Sector Credit Default Swap Index is rising 5.03% today to 129.0 basis points. This index is up from a low of 52.66 on May 5^th, but down from 157.81 on Sept. 16^th. The North American Investment Grade Credit Default Swap Index is rising 3.8% to 186.0 basis points. The TED spread is falling 1.8% to 3.81 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down another 14 basis points to 1.31%, which is down 132 basis points in about three months and at the lowest level since December 2001, when deflation was the concern. I said late last week that the US rescue plan was a large positive longer-term, but that a significant global response was necessary to reverse the ongoing credit markets freeze. There are particularly troublesome signs in Europe and the ECB is way behind the curve. France called for an emergency G8 meeting this afternoon, so hopefully more effort from the region is forthcoming. Nikkei futures indicate a -300 open in Japan and DAX futures indicate an +43 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, bargain-hunting and diminishing inflation expectations.

Today's Headlines

Bloomberg:
- The Federal Reserve will double its auctions of cash to banks to as much as $900 billion and is considering further steps to unfreeze short-term lending markets as the credit crunch deepens. ``The Federal Reserve stands ready to take additional measures as necessary to foster liquid money-market conditions,'' the central bank said in a statement released in Washington today. Fed and Treasury officials are ``consulting with market participants on ways to provide additional support for term unsecured funding markets,'' the statement said.

- Richard Fuld, the chief executive officer of Lehman Brothers Holdings Inc., said the investment bank was felled by rumors, out-of-date rules and slow reactions by regulators that fueled a ``storm of fear'' on Wall Street. ``Ultimately what happened to Lehman Brothers was caused by a lack of confidence,'' Fuld said today in written testimony to congressional investigators. ``This was not a lack of confidence in just Lehman Brothers, but part of what has been called a storm of fear enveloping the entire investment-banking field and our financial institutions generally,'' Fuld, 62, blamed ``a litany of destabilizing factors'' for Lehman's failure, including widening costs to borrow, accounting rules that forced it to write down the value of its assets to fire-sale prices, short selling without having to borrow the shares of a company, and imminent credit downgrades by rating companies.

- The euro had its biggest one-day drop against the yen since its 1999 debut as the deepening credit crisis prompted European governments to pledge bailouts for troubled banks while stopping short of coordinated action. The 15-nation currency fell below $1.35 for the first time since August 2007 after European authorities avoided announcing any plan comparable to the $700 billion U.S. bailout.

- Eli Lilly & Co.(LLY) agreed to buy ImClone Systems Inc.(IMCL), the biotechnology company controlled by billionaire Carl Icahn, for $6.5 billion, and Bristol-Myers Squibb Co. said it would drop its hostile bid.

- Commodities markets are heading for the biggest annual decline since 2001 as investors exit leveraged bets and slowing economic growth erodes demand for raw materials. The value of the 19 commodities in the Reuters-Jefferies CRB Index fell $280.6 billion, or 43 percent, from its July 3 peak, a loss larger than their total worth two years ago, data compiled by Bloomberg show. About 15 percent of investors in Boone Pickens's BP Capital LLC hedge fund may want their money back. The same credit-market seizure that led to last month's bankruptcy of New York-based Lehman Brothers Holdings Inc. and the forced sale of Merrill Lynch & Co. is squeezing speculators who drove commodities to record highs. Slower expansion in the U.S., China and India is also undermining prices of crude oil, which fell 39 percent, and corn, down 46 percent. ``The day of steadily rising commodity prices is over,'' said Chris Rupkey, the New York-based chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. ``A lot of the demand for commodities has been speculation, and now that demand is falling away because of fear taking hold in the market.'' Outstanding contracts for 17 commodity futures traded in New York and Chicago fell 26 percent since a peak on Feb. 29 to the fewest in two years, data compiled by Bloomberg show. About 450 commodity hedge funds held $80 billion of assets as of Sept. 1, up from $55 billion last year, said Brad Cole, president of Cole Partners Asset Management in Chicago. Investments in commodity indexes reached a record $175 billion at the end of June, Barclays Capital said. Institutional investors withdrew $5 billion from commodity indexes during the third quarter, according to Barclays Capital. The combination of outflows and dropping prices pushed assets under management in indexes down 31 percent to about $120 billion, the bank said. Funds of hedge funds in Europe may receive redemptions of up to 25 percent of assets by the end of the fourth quarter, said Aoifinn Devitt, founder of Clontarf Capital, a London-based investment consulting firm that tracks performance of about 20 commodity hedge funds.

- Emerging-market bonds and currencies tumbled on concern that the seizure in credit markets will trigger a global recession, squelching demand for the developing nations' commodity exports. The extra yield investors demand to own developing-nation bonds instead of U.S. Treasuries swelled 43 basis points, or 0.43 percentage point, to a four-year high of 4.80 percentage points at 11:32 a.m. in New York, according to JPMorgan Chase & Co. Brazil's real plummeted 5.34 percent to 2.1601 per dollar. ``In emerging markets, the credit crisis and drop in commodities create substantial challenges for monetary policy and fiscal accounts,'' said Igor Arsenin, an emerging-market fixed-income strategist at Credit Suisse Group in New York. ``Any country that needs capital in the form of foreign direct investment or portfolio flows is going to be vulnerable.''

- Emerging market stocks fell the most in at least two decades and exchanges in Brazil and Russia were forced to halt trading as the global banking crisis escalated in Europe and oil fell below $90 a barrel. Brazil's Bovespa index tumbled 15 percent, while Russia's Micex Index plunged nearly 20 percent before trading was halted for a third time today. China's benchmark CSI 300 Index slid 5.1 percent, its biggest one-day decline since August. Indonesia and Saudi Arabia lost the most in at least six years. The MSCI Emerging Markets Index slumped 11 percent, the biggest intraday loss since 1987 when Bloomberg records began.

- Citigroup Inc.(C) sued Wells Fargo & Co.(WFC) and its takeover target Wachovia Corp.(WB) for $60 billion, claiming their agreement violates its rights to buy a portion of the Charlotte, North Carolina-based lender under a previous deal.

- The Federal Reserve Bank of New York will meet tomorrow with banks and investors in credit-default swaps to gauge progress on an initiative to create a clearinghouse to curb risks in the market, a spokesman said.

- Hartford Financial Services Group Inc.(HIG), the Connecticut insurer facing credit downgrades, rose the most in eight years after saying Allianz SE will buy $2.5 billion of the company's stock and debt. The insurer surged $3.57, or 13 percent, to $30.97 at 10:58 a.m. in New York Stock Exchange composite trading, after gaining as much as 20 percent, the most since March of 2000.

- The benchmark index for U.S. stock options jumped to the highest in its 18-year history on concern the global economic slowdown will continue on further credit- market losses. The VIX, as the Chicago Board Options Exchange Volatility Index is known, rose 18 percent to 53.43 at 1:22 p.m. in New York and earlier touched 56.32.

Wall Street Journal:

- There is an upside to the weakening U.S. and global economies, at least if you're an American steel consumer. The commodity is more available, and prices have fallen 20% in the past three weeks. Behind the shift is a surge of foreign steel into the U.S., with the latest figures from August showing that steel imports from Russia jumped 86%, from India 37% and from China 33%. Analysts believe that the influx continued through September. The upshot is that steel buyers who have seen prices rise nonstop for nearly two years are finally getting some relief.

- J. Christopher Flowers has carved out a reputation as a deft turnaround artist of struggling financial institutions. He now must apply those skills to his own firm, private-equity shop J.C. Flowers & Co. On Friday, Mr. Flowers delivered grim news to his investors: His fund has marked down the value of $6.5 billion worth of investments by 30% -- an unrealized loss of nearly $2 billion, according to people familiar with the fund.

Atlanta Journal Constitution:
- The turmoil that is rewriting the rules of the banking industry may also be making it more likely that SunTrust(STI), the only major bank still headquartered in Atlanta, will become a takeover target — someday. But SunTrust’s standing as an independent bank may actually be more secure over the short term as would-be acquirers go after weaker game, several industry experts said.

AppleInsider:

- In a little over a year, Apple’s(AAPL) iPhone has grown to become the second best-selling mobile handset in the US, according to NPD. More specifically, NPD said the iPhone 3G was the No. 1 US smartphone based on units sales from June through August, outselling the Blackberry Curve, Blackberry Pearl, and Palm Centro. Of those customers who purchased an iPhone during those months, 30 percent switched from other mobile carriers to join AT&T, according to the firm. That compares to 23 percent of consumers who switched carriers during the same time period for other reasons. Nearly half of iPhone switchers (47 percent) made the jump to AT&T from rival Verizon Wireless, while 24 percent switched from T-Mobile. Another 19 percent are reported to have switched from Sprint. Also on Monday, two independent Apple analysts issued a report suggesting that Apple has more than surpassed its self-imposed goal of selling more than 10 million iPhones during the 2008 calendar year.

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Hedge Funds Review:

- Hedge funds will face increasing pressure from investors to ensure they have robust operational controls and risk management. This is one of the findings of the latest PwC global hedge funds white paper*. “It would not be surprising if investors, particularly institutional investors, do not start to request increasing levels of comfort on what they might consider are the key operational risks pertinent to these sort of structures (eg governance, investment management process, valuation, operational tax risks),” said Phillips. It is likely that the ability of prime brokers to lend to hedge funds will become even more difficult. Phillips said it was unlikely hedge funds will have access to prime broker capital as they did for lending and may need to start tapping other capital pools. This is likely to impact the funds’ overall investment ability. There will be increased costs to hedge fund managers of borrowing and credit will not be as cheap as it has been for them. Investors will demand a higher standard of operational risk and in particular will want funds to provide controls are in place regarding stress testing of prime broker relationships. Phillips said the industry overall will come under more pressure to adopt best practice standards like those outlined by the Hedge Funds Standards Board and the US President’s working group. While Phillips does not expect regulators to push for more legal controls of funds, recent legislation from the European parliament requires the EU commission to look at how to regulate funds in Europe. However, he does expect hedge funds to come under closer scrutiny and review by tax authorities eager to make up lost revenues due to the financial crisis.