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Wednesday Watch

Late-Night Headlines
Bloomberg:
- US stocks offer “good value” even though the economy is in a recession, Goldman Sachs Group Inc.’s(GS) Abby Joseph Cohen said. Companies in the S&P 500 trade for about 13 times next year’s estimated earnings, compared with a historical average of 18 times. The fourth quarter of this year will be the worst during the contraction, according to Cohen. “We do not think that there is a massive global recession out there,” she said. “We will start to see economic activity, particularly in the US, looking better in the second half of 2009” because of government stimulus.

- The cost of protecting Japanese and Australian corporate bonds from default declined, according to traders of credit default swaps. The Markit iTraxx Australia index was quoted 40 basis points lower at 290 as of 11:52 am in Sydney, Westpac Banking data show. The Markit iTraxx Japan index declined 20 basis points to 275, according to prices from Morgan Stanley.

- Boeing Co.(BA) machinists will vote Nov. 1 on a contract proposal to end an eight-week strike that's shuttered the second-largest planemaker's factories and pushed the 787 Dreamliner further behind schedule.

- Google Inc.(GOOG) will pay $125 million to settle two copyright lawsuits by publishers and authors over its book-scanning project, a ``historic'' deal that the company said will make millions of books searchable and printable online. The owner of the most popular Internet search engine said the agreement will expand the Google Book program to let online readers search for and buy copyrighted and out-of-print books in whole or page-by-page, and provide U.S. libraries with free access to the database. ``The tremendous wealth of knowledge that lies within the books of the world will now be at their fingertips,'' Google co- founder Sergey Brin said today in a statement, calling the accord ``historic.''

- Stephen Schwarzman, chairman of Blackstone Group LP, said private-equity firms that buy companies during the credit crisis may see ``phenomenal'' profits once global economic growth resumes. ``In periods like this, people get scared out of their minds,'' Schwarzman said in a speech at the North American Venture Capital Summit in Quebec City today. ``This kind of environment is tailor-made for making absolute fortunes in the private-equity business.''

- Money-market rates may decline in Asia for the first time this week after financing costs fell in Europe and the U.S. as cash injections by central banks showed signs of easing the paralysis among lenders. The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars, dropped 4 basis points to 3.47 percent yesterday, its 12th straight decline, according to the British Bankers' Association.

- Sales of longer-term commercial paper soared 10-fold after the Federal Reserve began buying the corporate IOUs, a sign that the central bank's efforts toward unlocking the market may be working. Companies yesterday sold 1,511 issues totaling a record $67.1 billion of the debt due in more than 80 days, compared with a daily average of 340 issues valued at $6.7 billion last week, according to Fed data. The central bank probably absorbed about $60 billion of the total, said Adolfo Laurenti, a senior economist at Mesirow Financial Inc. ``That's the very first really good news in quite some time,'' said Laurenti, who is based in Chicago.

- China and Hong Kong regulators may review short selling of stocks in the two markets to stem a slump in equities, newspapers said.

- Brazil's central bank may halt six months of interest-rate increases as drying credit slows the economy, trumping concern that inflation will quicken after a two-month, 25 percent slide in the local currency.

Wall Street Journal:
- Motorola Inc.'s(MOT) new cellphone chief is moving quickly to overhaul the struggling division, simplifying the way it makes devices and slashing additional jobs. Sanjay Jha, who became Motorola's co-chief executive in August, has decided to focus on Google Inc.'s(GOOG) Android software as the operating system for many of Motorola's new phones, according to people familiar with the matter.

- Treasury Department officials and the banking industry are mulling ways to expand the government's financial rescue plan to include non-publicly-traded banks, potentially opening up the program to thousands of new institutions.

- Rising gas prices have dramatically increased Americans' interest in tailoring their driving styles to save fuel. Now auto makers are rushing to help out. On Wednesday Ford Motor Co. will unveil a new dashboard system that is supposed to help people modify the way they drive to get every last mile out of a gallon of gas.

- Game Makers Push ‘Family’ Fare.

CNNMoney.com:
- Gasoline prices fell overnight, settling Tuesday to approach the lowest level in roughly three years, according to the American Automobile Association. The national average price for a gallon of regular gas fell to $2.629, down 3.9 cents from the day before, according to AAA's Daily Fuel Gauge Report. The last time gas was this low was Oct. 24, 2005 at $2.6237 a gallon.

- These are the days that bring out the power shopper in Larry Ellison. With so much chaos in the markets and panic in the boardrooms, the Oracle(ORCL) CEO sees right now as a fine time to stroll through Silicon Valley and buy pretty much whatever he wants.

BusinessWeek:

- The Iberian Giants of US Wind Energy. Backed by their parents’ capital, Iberdrola Renovables, from Spain, and Portugal’s EDP Renovaveis can exploit the downturn and snap up smaller rivals.

- Comcast’s(CMCSA) Revenues May Well Be in Good Shape. Analysts predict decent revenue growth for Comcast despite tighter household budgets, suggesting cable is no longer a discretionary item.

Editor & Publisher:
- CNN Courts Newspapers With New Wire Service. CNN is courting newspapers -- and possibly competing with The Associated Press -- with a new wire service the cable network plans to launch soon, with plans for an all-expenses-paid, three-day summit in December to show off its news gathering capabilities.

Financial Week:

- CME Group’s(CME) planned clearinghouse for credit default swaps will be ready to go at the end of this week—and can begin operating after it gets regulatory approvals and completes testing with trading firms, CME managing director Tim Doar said today. CME, the world’s largest derivatives exchange, has passed a series of internal tests aimed at gauging the system’s technical capability, financial safeguards and ability to conform to rule changes, Mr. Doar said in an interview.

Globe and Mail:

- Since many hedge fund managers like to drive Porsche roadsters, it's somehow appropriate that the German auto maker just ran them down. The European hedge fund community took a pounding Monday covering short positions in Volkswagen. Shares in the auto company doubled Monday on a short squeeze that came after Porsche announced it had used derivatives to build a 74 per cent stake in VW. That move brought a long-running takeover near the finish line, and also meant portfolio managers betting on a drop in Volkswagen shares had to cover positions. In their rush to cover shorts, often at massive losses, hedge funds pushed up the value of Volkswagen by 123 per cent on Monday, briefly making the auto maker the largest company on earth.

AFP:

- China is proposing that developed nations contribute 1% of their gross domestic product to help poor countries combat global warming, citing a Chinese government climate-policy official.

South China Morning Post:

- Rents for prime retail space in Hong Kong may fall 20% from their peak next year, citing property consultants. Colliers Intl. Property Consultants Inc. said the average retail rental in the city’s four main shopping districts – Mong Kok, Tsim Sha Tsui, Central and Causeway Bay – fell 4% quarter-on-quarter in the three months to September.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (HEW), target $50.

- Reiterated Buy on (ALB), target $30.

- Reiterated Buy on (FORM), target $28.

- Reiterated Buy on (FISV), target $56.

Night Trading
Asian Indices are +1.75% to +5.0% on average.
S&P 500 futures -.67%.
NASDAQ 100 futures -.99%.

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Earnings of Note
Company/EPS Estimate
- (GLW)/.43

- (ANR)/.98

- (AGN)/.65

- (CAH)/.70

- (PG)/1.00

- (SEE)/.39

- (NEM)/.43

- (MGM)/.32

- (PX)/1.07

- (SPW)/1.65

- (ODP)/.07

- (HES)/2.45

- (AG)/.78

- (MCO)/.41

- (CMCSA)/.22

- (AET)/1.12

- (KFT)/.43

- (Q)/.10

- (BWA)/.55

- (MXIM)/.27

- (CA)/.38

- (PRU)/.78

- (HIG)/-.91

- (MUR)/2.65

- (OI)/.85

- (V)/.56

- (CME)/3.95

- (FSLR)/1.00

- (ITRI)/.80

- (SYMC)/.35

- (JNY)/.33

- (K)/.81

- (TSO)/1.57

Economic Releases
8:30 am EST

- Durable Goods Orders for September are estimated to fall 1.1% versus a 4.8% decline in August.

- Durables Ex Transports for September are estimated to fall 1.5% versus a 3.3% decline in August.

10:23 am EST

- Bloomberg consensus estimates call for a weekly crude oil inventory build of +1,550,000 barrels versus a +3,182,000 barrel increase the prior week. Gasoline supplies are estimated to rise by +1,500,000 barrels versus a +2,709,000 barrel increase the prior week. Distillate inventories are expected to rise by +1,050,000 barrels versus a +2,156,000 barrel build the prior week. Finally, Refinery Utilization is estimated to rise by +.5% versus a +2.51% increase the prior week.

2:15 pm EST

- The FOMC is expected to cut the benchmark Fed Funds rate to 1.0% from 1.5%.

Upcoming Splits
- (BKE) 3-for-2

Other Potential Market Movers
- The weekly MBA mortgage applications report, (KCI) analyst day, Sidoti Emerging Growth Forum and BIO Investor Forum could also impact trading today.

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

Stocks Finish Sharply Higher, Boosted by Airline, Retail, REIT, Financial, Commodity, Technology, Homebuilding and Telecom Shares

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In Play

Stocks Soaring into Close on Less Financial Sector Pessimism, Short-Covering and Bargain-Hunting

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Medical longs, Computer longs, Biotech longs, Retail longs and Internet longs. I covered all of my (IWM)/(QQQQ) hedges today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, almost every sector is rising and volume is above average. Investor anxiety is very high. Today’s overall market action is bullish. The VIX is falling 11.9% and is historically elevated at 70.58. The ISE Sentiment Index is very low at 96.0 and the total put/call is above average at 1.11. Finally, the NYSE Arms has been running low most of the day, hitting .26 at its intraday trough, and is currently .40. The Euro Financial Sector Credit Default Swap Index is falling 2.9% today to 110.0 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 gaining 1.7% to 223.80 basis points. The TED spread is falling 1.6% to 271 basis points. The TED spread is now down 193 basis points in under three weeks. The 2-year swap spread is up 2.05% to 122.2 basis points. The Libor-OIS spread is falling .23% to 262 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 6 basis points to .80%, which is down 183 basis points in about four months and at the lowest level since January 1999. The US dollar is rising the most against the yen since January 1974. I suspect the dollar will see a pullback against the euro, as it is very extended. This could give a boost to commodities in the short-run. It is extremely positive to see stocks finally ignore more negative news as consumer confidence hit the lowest reading on record. Historically, major lows for US stocks are made around the time of major lows in confidence. Given the rumor’s surrounding (MS)/(GS) the (XLF)’s 9.1% move higher is even more impressive. As well, given the massive profits for short-sellers this month, I would expect to see some more meaningful short-covering and another significant move higher for US stocks before week’s end. Nikkei futures indicate an +500 open in Japan and DAX futures indicate an +7 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, less financial sector pessimism, diminishing forced selling and bargain-hunting.

Today's Headlines

Bloomberg:
- U.S. stocks rallied, following gains in Asian and European markets, as the cheapest valuations in more than two decades lured investors back into equities. ``Anyone who has a long-term view and looks at earnings multiples and inflation will say it's a cheap moment to buy stocks,'' said Linda Duessel, equity market strategist at Pittsburgh-based Federated Investors Inc., which manages more than $333 billion. The S&P 500 was valued at 10.7 times estimated profit when trading opened today, the cheapest compared with the multiple using trailing profit since 1985. ``We're in the camp that believes a bottoming process is in place,'' said Leo Grohowski, chief investment officer for the wealth management unit of Bank of New York Mellon Corp., which manages $162 billion. The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars fell 4 basis points to 3.47 percent today, according to the British Bankers' Association. It was the 12th straight drop for the rate.

- The Baltic Dry Index, the benchmark for commodity shipping costs, fell below 1,000 for the first time in six years as the lack of credit curbed global trade and shipowners threatened to shun orders.

- The cost of protecting European corporate bonds from default fell, according to traders of credit-default swaps. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-risk, high-yield credit ratings dropped 28 basis points to 852, according to JPMorgan Chase & Co. prices at 7:23 a.m. in London. The Markit iTraxx Europe index of 125 companies with investment-grade ratings declined 6 basis points to 164, JPMorgan prices show.

- World Is ‘Drowning in Oil’(Again) After Drought.

- Germany's financial-markets regulator is looking into trading of Volkswagen AG shares after Porsche SE's plan to raise its stake in the automaker triggered a fourfold increase in two days. BaFin is monitoring Volkswagen and hasn't started a formal probe, said spokeswoman Anja Engelland. The gains follow Porsche's Oct. 26 announcement that it plans to increase the stake in Volkswagen to 75 percent. The move forced short-sellers to cover their bets on a decline in the stock.

- Morgan Stanley(MS) fell as much as 26 percent in New York trading while larger rival Goldman Sachs Group Inc.(GS) dropped as much as 11 percent amid speculation a surge in Volkswagen AG shares may have saddled some banks with losses.

Wall Street Journal:

- Obama’s ‘Redistribution’ Constitution. The courts are poised for a takeover by the judicial left. One of the great unappreciated stories of the past eight years is how thoroughly Senate Democrats thwarted efforts by President Bush to appoint judges to the lower federal courts.

CNBC.com:
- Roughly half the investors in T. Boone Pickens' BP Capital hedge fund have asked to withdraw their money after losses of about 60 percent this year, a source familiar with the situation said on Tuesday. The Texas oil tycoon and his investment fund, which had invested primarily in the energy sector, have lost about $2 billion since peaking in late June, the source said.

NY Post:

- Hedge funds are once again on track to post their worst monthly return in at least a decade - and the bloodshed this time may exceed the record set 10 years ago. As of last week, the average hedge fund was down 8.4 percent for Oct., according to research firm Hedge Fund Research. The mounting losses are hurting even the biggest names in the business - testing the long-held theory that the large, institutional guys are better insulated than everyone else. For the year, hedge funds are down more than 19 percent, according to data obtained by The Post.

Houston Chronicle:
- After five years of robust economic growth in Latin America, the global financial crisis appears set to bring its boom to a swift and painful halt. Economic growth in Latin America, the World Bank says, will slow from annual rates of about 5 percent to between 2.5 percent and 3.5 percent in 2009. And some analysts believe the situation will worsen before it improves.

USA Today:

- Competitive Costs Give Hydropower New Spark.

Les Echos:

- Ian Stannard, a currency strategist at BNP Paribas SA, said the euro may fall to $1.17 at the end of the year, $1.07 in the first quarter of 2009 and to $1 “soon,” citing an interview. The euro will drop because it’s harder to make economic and political decisions in the face of the crisis in Europe, Stannard said. The credit crisis will also hurt eastern European countries, which were helping Europe’s growth. China’s economic slowdown is also pointing to a gain in the US dollar, as foreign investments will slow, Stannard said. The dollar is a haven in the global economic turmoil.

The National:

- Barack Obama is the overwhelming better choice among Middle East residents to become the next US president. Mr Obama was favored by 51.1 per cent, while only 8.8 per cent of the respondents chose John McCain, his Republican opponent, in an online survey conducted for The National by Real Opinions, an online research company, this month.