Monday Watch

Weekend Headlines
Bloomberg:

- European Central Bank President Jean- Claude Trichet said the banking system is ``on the path'' to recovery after policy makers pumped unprecedented amounts of cash into money markets. ``I expect the banks to normalize their relationships, meaning that they start lending to each other and that they lend to their clients,'' Trichet said in an interview on French radio RTL today. The banking system is ``on the path to normalization,'' he said.

- European Central Bank council member George Provopoulos said the ECB stands ready to act to ensure stability in financial markets. ``At present, restoring confidence in financial markets globally remains the main priority of all,'' he said.

- ING Groep NV, the biggest Dutch financial-services firm, will get 10 billion euros ($13.4 billion) from the Netherlands after warning Oct. 17 of its first quarterly loss and falling the most in Amsterdam trading since 1991.

- Bond Default Risk Has First Weekly Fall Since Lehman Collapse.

- The cost of protecting Australian corporate bonds from default declined, credit-default swaps show. The Markit iTraxx Australia index was quoted 25 basis points lower at 220 as of 11:13 a.m. in Sydney, down from a trade at 245 late on Oct. 17, according to Citigroup Inc.

- OPEC, the supplier of more than 40 percent of the world's oil, plans to cut output for the first time in almost two years as the worst financial crisis since the 1930s sends crude toward $50 a barrel. Options contracts to sell oil at $50 by December soared 28- fold in the past two weeks on the New York Mercantile Exchange. Goldman Sachs Group Inc. and Merrill Lynch & Co. analysts say crude, which fell more than 50 percent from a record high in July to $71.85 a barrel last week, may drop another 44 percent should the world economy slip into a recession. The Organization of Petroleum Exporting Countries, which meets Oct. 24 in Vienna, three weeks earlier than planned, is facing the weakest growth in demand since 1993 just as new fields come on line from Angola to the Gulf of Mexico. ``OPEC is going to try to prevent some of the price decline,'' Francisco Blanch, head of global commodities research at Merrill in London, said in a Bloomberg television interview. ``It's going to be very difficult to stem a price fall.''

- The leaders of the U.S., France and the European Commission will ask other world leaders to join in a series of summits on the global financial crisis beginning in the U.S. soon after the Nov. 4 presidential election. President George W. Bush, French President Nicolas Sarkozy and European Commission President Jose Barroso said in a joint statement after meeting yesterday that they will continue pressing for coordination to address ``the challenges facing the global economy.''

- Republican presidential nominee John McCain said record spending by Democratic rival Barack Obama had upset the U.S. campaign finance system and eventually would lead to a ``scandal.'' Senator Obama of Illinois raised more than $150 million in September, more than doubling the previous one-month record he had set in August. The campaign has now raised $605 million. ``The dam is broken,'' McCain said on the ``Fox News Sunday'' program. ``We're now going to see huge amounts of money coming into political campaigns, and we know history tells us that always leads to scandal.'' McCain, a senator from Arizona, also accused Obama of advocating ``one of the tenets of socialism'' by planning a ``redistribution of the wealth.'' ``We don't know where the money came from -- a lot of strange things going on in this campaign,'' McCain said. ``The American people should know where every penny came from. They know where every penny of my campaign contributions came from.''

- The price of regular gasoline at U.S. filling stations fell below $3 a gallon for the first time in eight months as demand weakens, an industry survey showed yesterday. The average price fell 3.7 cents to $2.954 a gallon, down 28 percent from an all-time high of $4.114 in July, AAA, the nation's biggest motoring club, said today on its Web site. Gasoline demand this year peaked at 9.65 million barrels a day in the week ended Aug. 1, 5.9 percent below the 2007 maximum of 10.25 million barrels a day, according to MasterCard Inc. U.S. refineries have operated at an average 84.9 percent of capacity this year, down 4 percentage points from a year earlier, according to the Energy Department. The number of miles driven by Americans this year may fall for the first time since 1980, according to the Federal Highway Administration.

- South Korea sought to rescue its financial system by guaranteeing $100 billion of lenders' foreign-currency debts and providing $30 billion in U.S. dollars to banks.

- The supervisory board of Groupe Caisse d'Epargne, France's third-biggest consumer banking network, ousted the bank's chairman and chief executive officer after suffering a $807 million trading loss.

- Millennium Global Investments Ltd., a London-based asset manager with $15 billion in assets, is liquidating a hedge fund that buys emerging-market debt after lenders withdrew credit, according to two people familiar with the situation.

- China's economy grew 9 percent in the third quarter, the slowest pace in five years. Rio Tinto Group(RTP), the world's second-largest aluminum producer, last week flagged ``significantly weaker'' demand for the metal in China. Prices for Chinese imports of iron ore also fell to a 19-month low on cooling demand from steelmakers. Export growth may plummet from 22 percent in the first nine months of this year to ``zero or even negative growth'' in 2009, according to Stephen Green, head of China research at Standard Chartered Bank Plc in Shanghai. Weakness in the property market is also a threat to growth. Home sales by volume plunged 55.5 percent and 38.5 percent in Beijing and Shanghai in the first eight months from a year earlier, the official Xinhua News Agency reported, citing the China Real Estate Association.

- Nissan Motor Co., Japan's third- largest automaker, rose as much as 7.6 percent on the Tokyo Stock Exchange after UBS AG raised the carmaker's rating because the stock's decline has boosted its dividend yield.

Wall Street Journal:

- Credit markets may have their first significant thawing in months this week, building on a boost in bank lending on Friday and government moves to restore trust between lenders and borrowers. On Friday, three big banks led by J.P. Morgan Chase & Co. made multibillion-dollar offers of three-month funds to European counterparts, causing an immediate stir in the shriveled markets for unsecured lending. That raised expectations that lenders would finally open their doors and businesses would be able to borrow again, removing one of the biggest stresses on the global economy. In response, futures markets are predicting sharp declines in the rates banks charge one another to borrow, with the benchmark three-month Libor, or London interbank offered rate, expected to drop by around half a percentage point from 4.41875% Friday. "We're getting an accumulation of evidence that things are starting to unfreeze," said Carl Lantz, interest-rate strategist at Credit Suisse in New York.

- The International Monetary Fund has launched an investigation into whether its chief, Dominique Strauss-Kahn, abused his position in connection with a sexual relationship with a subordinate, in a case that could roil a key global institution at a crucial moment in the world financial crisis.

- Movie-goers elected a "W," but it was Mark Wahlberg, not George W. Bush. Wahlberg's action flick "Max Payne" debuted with $18 million to outdo Oliver Stone's film biography of George W. Bush, according to studio estimates Sunday. Mr. Stone's "W." actually ran fourth, opening with $10.6 million to finish behind the family comedy "Beverly Hills Chihuahua" (No. 2 with $11.2 million) and the chick flick "The Secret Life of Bees" (No. 3 with $11.1 million).

- NBC Universal is looking to shave $500 million from next year's budget. The General Electric Co.(GE) unit, which includes broadcast and cable-TV networks, local television stations and a movie studio, says the cuts will amount to 3% of its 2009 budget.

Barron’s:

- Insider buying surpassed selling by a 3-to-1 margin in the week ended Oct.14, as executives invested in energy, retail, and small financial companies, citing InsiderScore.com. The ratio of buying to selling was almost even four weeks ago. In the past three months, insiders invested hundreds of millions in security software services($640 million), waste management companies($486 million) and electric utilities($317 million), Barron’s said. Through his hedge fund, ESL Investments, Edward Lampert, bought $27.6 million of AutoZone Inc.(AZO) as the stock reached a two-year low.

MarketWatch.com:

- OPEC over a barrel. According to the latest data from Hedge Fund Research, third-quarter hedge fund redemptions hit a record-high $210 billion, spearheading an exodus wealth that burst one of the biggest commodities bubbles of all time. It's no coincidence that oil prices plunged in tandem with these record withdrawals, exposing for all to see just how much of the summer's oil-price spike was driven by speculators.

NY Times:

- Michael R. Bloomberg, who says he strictly separates his philanthropy from his job as mayor of New York, is pressing many of the community, arts and neighborhood groups that rely on his private donations to make the case for his third term, according to interviews with those involved in the effort.

- Swapping Secrecy for Transparency by SEC chairman Chris Cox. The historic volatility in the financial markets has raised important questions about the lack of meaningful regulation of financial instruments known as credit-default swaps. The $85 billion government rescue last month of the insurance conglomerate American International Group, for example, was needed in large part to protect those who held A.I.G.’s credit-default swaps and risked crushing losses if those instruments weren’t honored.

- Treasury Secretary Henry Paulson faces criticism over his predilection toward hiring executives and bankers from his former firm Goldman Sachs Group Inc.(GS). Univ. of Texas professor James Galbraith said there are potential conflicts of interest if the executives still own Goldman Sachs stock that may benefit based on their decisions.

- Financial Crisis Provides Fertile Ground for Boom in Lawsuits. Nothing makes lawyers more popular than bad times.

CBS News:

- U.S. Rep. Tim Mahoney, embroiled in an adultery scandal and a tight race for re-election, admitted Friday to having at least two affairs but insisted he broke no laws and will not resign. The first-term Democrat conceded that one of the affairs began as he was running on a family values platform to replace Mark Foley, a Republican who resigned amid revelations that he sent lurid Internet messages to male pages who had worked on Capitol Hill as teenagers. Mahoney, 52, apologized to his wife, his daughter and his constituents, even as he maintained he hadn't been hypocritical.

CNNMoney.com:

- BofA chief optimistic about financial bailout. Bank of America Chief Executive Kenneth Lewis says the $25 billion the government is injecting into his bank will be put to work making loans and be paid back at the latest in five years.

AP:

- A crude oil production cut of even 1 million barrels per day at OPEC's upcoming emergency meeting is unlikely to reverse slumping prices in the short term, analysts said Sunday, amid mounting calls by several cartel members to take action to keep prices at the $80 per barrel level. That presents OPEC with a dilemma. If they announce too big a cut, they risk fueling the global financial crisis. But, cut too little, and $80 per barrel will be wishful thinking. Some OPEC officials have said prices closer to $100 per barrel are ideal. Even if the members agree on a production cut, 1 million barrels will not be enough and "there will be cheating on the quotas from day one," said Al-Harami, who served as former president of Q8, the retail arm of the Kuwait Petroleum Corp. Al-Harami believes the group is being hasty in moving to cut production and believes they should hold off until at least the winter when demand for energy for heating picks up. The International Energy Agency, the U.S. Energy Information Administration and, most recently, OPEC have all lowered their forecasts for energy demand heading into next year. Such revisions, in tandem with the price drops, are particularly worrisome for some top producers like Iran -- the cartel's second largest crude exporter, which relies on oil revenue for about 80 percent of its government budget. Iranian officials have repeatedly said crude at $100 seems fair. Others, including Qatar's oil minister and Venezuelan President Hugo Chavez, have pushed for levels closer to $80-90. Ultimately, added Al-Harami, "the biggest player is Saudi, and what Saudi decides, the others have to follow."

Reuters:

- China Investment Corp, the country's sovereign wealth fund, has raised its stake in private equity firm Blackstone Group (BX) above 10 percent, Chinese official media reported on Saturday. The official Shanghai Securities News also said on Saturday that CIC confirmed reports it planned to boost its stake to 12.5 percent from its original 9.9 percent holding by buying shares on the open market.

- Democrat Barack Obama's lead over Republican John McCain in the presidential race has dropped to 3 points, according to a Reuters/C-SPAN/Zogby poll released on Sunday. Obama leads McCain by 48 to 45 percent among likely U.S. voters, down 1 percentage point from Saturday. The four-day tracking poll, which has a margin of error of 2.9 points. Pollster John Zogby said the numbers were good news for McCain, and probably reflected a bump following his appearance in the third and final presidential debate on Wednesday. "For the first time in the polling McCain is up above 45 percent. There is no question something has happened," Zogby said.

Financial Times:

- Hedge funds poised for harsh phase of evolution. Hedge fund indices differ widely but they agree that hedge funds started to lose money in July - and lost it in a big way last month. Why? This must be guesswork, but a popular hedge fund strategy involved selling short the stocks of banks while betting on energy prices to increase. The argument was that lower rates to combat the credit crisis would feed through into inflation and cause funds to flow into oil. In the year to mid-July, this trade netted 345 per cent. But then the oil bubble burst. Since then, the "long oil short banks" trade has lost 57 per cent.

- As some Asian countries rushed to restrict short selling last month to support plunging share markets, the first reaction in the alternative investment world was panic. "People were running around like headless chickens," says one Australian hedge fund sales manager in Hong Kong. The worry is that temporary limitations show some signs of becoming more politically acceptable and entrenched as the region's stock markets remain jumpy.

- Procter & Gamble(PG) is testing its ability to use the internet to sell its toothpaste, household cleaners and nappies directly to US households, in a potential long-term strategic challenge to its retail partners.

- "Stronger for longer" was the rallying cry. But it turns out that mining companies were simply wronger for longer - the five-year commodity boom was just another asset price bubble after all. Indeed, the warning signs were there. Salt of the earth miners swapped their beards for expensive suits. Truck drivers demanded six-figure salaries. And, as ever, there was a new paradigm. The internet was worshipped during the dotcom years. This time it was China. Those who "didn't get it" were unreconstructed heretics.

TimesOnline:
- Stocks have tumbled to their cheapest for a generation, and company bosses took advantage of last week’s turmoil to snap up shares. “For long-term investors, there are some causes for optimism. Equity markets are now firmly pricing in global recession, with shares on some measures the lowest for a generation,” said Paul Niven at fund manager F&C. Company directors seemed to agree, buying their own shares with gusto. Directors’ dealings — traditionally a key “buy” signal — last week spiked to a buy-to-sell ratio of 25-to-1 by volume. That compares with a long-term average of 2.5-to-1, an average of 8-to-1 in the past 12 months and a ratio of 10-to-1 at the end of the 2003 bear market, financial data firm Digital Look said.

Telegraph:

- The $54trillion credit derivatives market faces a delicate test as $360bn worth of contracts on now-defaulted derivatives on Lehman Brothers are due to be settled on Tuesday.

21^st Century Business Herald:

- China’s economy has risks of deflation and an outflow of capital as a global financial crisis worsens, citing Liu Mingkang, chairman of the China Banking Regulatory Commission. Commercial banks should be wary of the risks in property credit, Liu said.

South China Morning Post:

- Las Vegas Sands Corp.(LVS) scrapped its plan to raise $5.25 billion in loans for its expansion in Macau because of the global credit crisis, citing officials.

Weekend Recommendations
Barron's:
- Made positive comments on EMKR, MTU, AFFX, BGG, ABT, UPS, BBY, BBBY and CDNS.

- Made negative comments on EBAY.

Citigroup:

- Reiterated Buy on (FHN), target $14.

- Upgraded (CVS) to Buy, target $23.

- Reiterated Buy on (CRM), target $51.

- Reiterated Buy on (HON), target $50.

Night Trading
Asian indices are -1.50% to +2.0% on avg.
S&P 500 futures +.91%.
NASDAQ 100 futures +.95%.

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Earnings of Note
Company/Estimate
- (ETN)/1.88

- (HAL)/.74

- (MAT)/.71

- (TXN)/.44

- (NFLX)/.31

- (AXP)/.59

- (LNCR)/.72

- (SNDK)/-.27

- (HAS)/.86

Upcoming Splits

- None of note

Economic Releases

10:00 am EST

- Leading Indicators for September are estimated to fall .1% versus a .5% decline in August.

Other Potential Market Movers
- None of note

BOTTOM LINE: Asian indices are mostly higher, boosted by automaker and financial shares in the region. I expect US stocks to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the week.

Weekly Outlook

Click here for a weekly preview by MarketWatch.

Click here for stocks in focus for Monday by MarketWatch.

There are a few economic reports of note and several significant corporate earnings reports scheduled for release this week.

Economic reports for the week include:

Mon. – Leading Indicators

Tues. – Weekly retail sales

Wed. – Weekly EIA energy inventory report, weekly MBA Mortgage Applications report

Thur. – Initial Jobless Claims, House Price Index

Fri. – Existing Home Sales

Some of the more noteworthy companies that release quarterly earnings this week are:

Mon. – Halliburton Co.(HAL), Eaton Corp.(ETN), Mattel Inc.(MAT), NetFlix(NFLX), Texas Instruments(TXN), American Express(AXP), Lincare Holdings(LNCR), SanDisk Corp.(SNDK), Hasbro Inc.(HAS)

Tues. – Brinker International(EAT), Freeport-McMoRan(FCX), 3M Co.(MMM), Quest Diagnostics(DGX), Biogen Idec(BIIB), Lockheed Martin(LMT), BlackRock Inc.(BLK), Forest Labs(FRX), Du Pont(DD), Caterpillar Inc.(CAT), Keycorp(KEY), AK Steel(AKS), Manpower Inc.(MAN), Norfolk Southern(NSC), Boston Scientific(BSX), QLogic Corp.(QLGC), Cerner Corp.(CERN), VMware Inc.(VMW), Panera Bread(PNRA), Illumina(ILMN), Broadcom(BRCM), Coach Inc.(COH), UAL Corp.(UAUA), Omnicom Group(OMC), Raymond James(RJF), Lexmark(LXK), Pfizer(PFE), Apple Inc.(AAPL), Schering-Plough(SGP), Stanley Works(SWK), National City(NCC), Yahoo! Inc.(YHOO)

Wed. – Foundation Coal(FCL), Baker Hughes(BHI), McDonald’s(MCD), WellPoint(WLP), Philip Morris(PM), PF Changs(PFCB), Wyeth(WYE), Boeing(BA), AT&T(T), ConocoPhillips(COP), Chipotle Mexican Grill(CMG), Allstate(ALL), Pulte Homes(PHM), Ryland Group(RYL), Wachovia Corp.(WB), EMC Corp.(EMC), Genzyme Corp.(GENZ), General Dynamics(GD), Northrop Grumman(NOC), Travelers(TRV), Kimberly-Clark(KMB), Lam Research(LRCX), Amgen Inc.(AMGN), Amazon.com(AMZN), Merck(MRK)

Thur. – New York Times(NYT), Goodrich(GR), SunTrust Banks(STI), L-3 Communications, Starwood Hotels(HOT), Dow Chemical(DOW), Altria Group(MO), Raytheon(RTN), Zimmer(ZMH), United Parcel Service(UPS), Burlington Northern(BNI), Microsoft Corp.(MSFT), Juniper Networks(JNPR), YRC Worldwide(YRCW), Western Digital(WDC), Ingram Micro(IM), Cheesecake Factory(CAKE), Aflac(AFL), Celgene Corp.(CELG), Deckers Outdoor(DECK), Eli Lilly(ELY), Diamond Offshore(DO), Black & Decker(BDK), Bristol-Myers(BMY), RadioShack(RSH), Microchip Tech(MCHP)

Fri. – ITT Corp.(ITT), Fortune Brands(FO), ImClone(IMCL)

Other events that have market-moving potential this week include:

Mon. – None of note

Tue. – None of note

Wed. – (UTEK) analyst meeting

Thur. – (CETV) investor day

Fri. – None of note

BOTTOM LINE: I expect US stocks to finish the week modestly higher on bargain-hunting, technical buying, less credit market angst, diminishing financial sector pessimism and short-covering. My trading indicators are giving neutral signals and the Portfolio is 100% net long heading into the week.

Market Week in Review

S&P 500 940.55 +4.60%*

Click here for the Weekly Wrap by Briefing.com.

*5-Day Change

Weekly Scoreboard*

Indices
S&P 500 940.55 +4.60%
DJIA 8,852.22 +4.75%
NASDAQ 1,711.29 +3.75%
Russell 2000 526.43 +.76%
Wilshire 5000 9,475.35 +4.26%
Russell 1000 Growth 388.18 +3.58%
Russell 1000 Value 504.79 +5.33%
Morgan Stanley Consumer 565.68 +3.84%
Morgan Stanley Cyclical 558.70 -4.65%
Morgan Stanley Technology 371.33 +2.19%
Transports 3,692.73 -1.39%
Utilities 354.60 +9.25%
MSCI Emerging Markets 24.28 -1.53%

Sentiment/Internals
NYSE Cumulative A/D Line 22,478 -7.57%
Bloomberg New Highs-Lows Index -1,788 +64.63%
Bloomberg Crude Oil % Bulls 36.0 +20.0%
CFTC Oil Large Speculative Longs 164,118 -1.0%
Total Put/Call .97 -27.07%
OEX Put/Call 1.39 +78.21%
ISE Sentiment 127.0 +4.96%
NYSE Arms 1.41 -11.87%
Volatility(VIX) 70.33 +.54%
G7 Currency Volatility (VXY) 16.73 -15.46%
Smart Money Flow Index 6,140.42 -6.25%
AAII % Bulls 40.94 +30.09%
AAII % Bears 39.77 -34.63%

Futures Spot Prices
Crude Oil 72.12 -9.77%
Reformulated Gasoline 167.05 -10.09%
Natural Gas 6.87 +3.55%
Heating Oil 213.75 -5.61%
Gold 786.50 -7.56%
Base Metals 146.12 -6.39%
Copper 214.95 -.85%
Agriculture 295.83 +.04%

Economy
10-year US Treasury Yield 3.92% +5 basis points
10-year TIPS Spread 1.06% +13 basis points
TED Spread 3.63 -101 basis points
N. Amer. Investment Grade Credit Default Swap Index 200.06 -3.41%
Emerging Markets Credit Default Swap Index 654.65 +4.0%
Citi US Economic Surprise Index -38.80 -557.63%
Fed Fund Futures imply 48.0% chance of 25 basis point cut, 52.0% chance of 50 basis point cut on 10/29
Iraqi 2028 Govt Bonds 55.0 -3.93%
4-Wk MA of Jobless Claims 483,300 +.2%
Average 30-year Mortgage Rate 6.46% +52 basis points
Weekly Mortgage Applications 489,300 +5.11%
Weekly Retail Sales +.5%
Nationwide Gas $3.04/gallon -.31/gallon
US Cooling Demand Next 7 Days 19.0% below normal
ECRI Weekly Leading Economic Index 117.0 -2.99%
US Dollar Index 82.53 -.70%
Baltic Dry Index 1,506 -39.83%
CRB Index 282.14 -2.67%

Best Performing Style
Large-cap Value +5.33%

Worst Performing Style
Small-cap Value +.23%

Leading Sectors
Airlines +37.58%
I-Banks +12.63%
HMOs +10.77%
Drugs +9.47%
Utilities +9.25%

Lagging Sectors
Road & Rail -1.66%
Semis -3.77%
Papers -9.63%
REITs -11.69%
Gold -14.43%

One-Week High-Volume Gainers

One-Week High-Volume Losers

*5-Day Change

Stocks Finish Lower, Weighed Down by Bank, Gold and Semi Shares

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