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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Erin Callan, the former chief financial officer of Lehman Brothers Holdings Inc.(LEH), was hired by Credit Suisse Group AG to head a unit that advises hedge funds.
- Copper tumbled the most in a week as falling imports in China and a weakening outlook for the global economy increased speculation that metals demand will decline. China's imports of copper and alloys plunged 19 percent last month from a year earlier, data from the nation's customs office showed.
- Representative Barney Frank, the Democrat who chairs the House panel overseeing housing, aims to include penalties for Fannie Mae(FNM) and Freddie Mac(FRE) in legislation authorizing a rescue of the beleaguered mortgage firms.
- Intel Corp.(INTC), the world's biggest chipmaker, reported a 25 percent increase in second-quarter profit and gave a sales forecast that topped analysts' estimates after demand grew worldwide for personal-computer processors. The stock gained 20 cents to $20.91 in extended trading.
- SK Telecom Co., South Korea’s largest mobile-phone operator, declined to confirm or deny a CNBC report that the company may seek to buy Sprint Nextel Corp.(S). “There is nothing we can say on the report,” Ryu Mina, a spokeswoman for Seoul-based SK Telecom, said. Separately, Sprint and SK Telecom are in talks to forge a partnership to develop new phones and services, the Wall Street Journal reported.

Wall Street Journal:
- Just a few weeks ago, Europe thought it could escape the worst of the global slowdown. Now it looks like the euro zone, the world's second-largest economy, is headed for a hard landing and perhaps recession, compounding growth troubles around the world.
- Federal regulators are stepping up efforts to ensure the banking industry's access to short-term cash, amid concerns about bank runs and worries that liquidity-conscious lenders will hoard money and stop making loans.

MarketWatch.com:
- Sony Corp.(SNE) surprised some at the annual E3 conference on Tuesday by reducing the price of its high end PlayStation 3 console, following Microsoft Corp's(MSFT) earlier move to reduce the price of its Xbox 360.
- Holders of debt issued by Fannie Mae and Freddie Mac haven't broken a sweat over the mortgage agencies' financial situation, taking the mounting worries about their loan losses as a good excuse to snap up their bonds.
- Short sellers had their best month in more than seven years in June as the stock market slumped. The Strunk Short Index, which tracks a handful of managers that specialize in short selling, jumped 10.47% last month. That was the best performance since March 2001, when the index surged 12.45% during the dot-com bust.

CNBC.com:
- Lehman CEO Dick Fuld issued a memo yesterday that many people inside Lehman consider an advertisement for the firm to be bought possibly by private equity or possibly a bank — at a level above its current market price.

NY Times:
- Seeing Oil Bubble, a Contrarian Bets on an Indian Airline. Wilbur L. Ross Jr.’s latest deal, an $80 million investment in the flailing Indian airline SpiceJet, announced on Tuesday, is hardly earth shaking, but the idea behind it is typically contrarian. Mr. Ross has decided that high oil prices have hit bubble territory, a bubble that should pop in the next 12 months. “We’re looking at everything that has been hurt by fuel” for deals, he said in a phone interview.

CFO.com:
- SEC Declares War on Short-Selling, Rumors. All short-sellers of Fannie Mae(FNM) and Freddie Mac must pre-borrow stock before shorting the shares of either of the mortgage-finance giants. The Securities and Exchange Commission is issuing an emergency order aimed at reducing short-selling in the stock of Fannie Mae and Freddie Mac and Wall Street brokerage firms and is considering extending those trading limits to the broader equity markets.

CNNMoney.com:
- iPhone 3G: Sold out in 21 states.

USA Today.com:
- Russian Coreflood Gang targets online bank accounts.

Fox Business News:
- The SEC handed out subpoenas to 50 hedge fund advisers as it investigates whether shares of Bear Stearns or Lehman Brothers were manipulated by false rumors, according to the Wall Street Journal. Some of the hedge funds receiving subpoenas are SAC Capital Advisors in Stamford, Conn. and Citadel Investment Group LLC in Chicago. Some of the hedge funds have already turned information in to the SEC, while others just received subpoenas on Monday.

Reuters:
- It's a bear market for Warren Buffett's Berkshire Hathaway Inc (BRKa.), too. The shares of the billionaire's insurance and investment company have dropped more than 20 percent from their most recent peak, the first time that has happened since February 2003.
- In Brazil, middle class dreams built on credit.

Financial Times:
- The past few years have been characterised by a dramatic surge in lending allied with a decline in lending standards. But this trend has not been restricted to the source of the subprime debacle: the US housing market. Some now fear that the recent rush to extend credit on any terms has set the scene for a raft of corporate defaults. Those fears are overdone.

TimesOnline:
- The Financial Services Authority (FSA) mounted a fierce defence of its regulation of the oil markets yesterday amid growing criticism that its approach may be contributing to manipulation and prices of nearly $150 a barrel.

Thestar.com:
- Royal Dutch Shell has nearly doubled its ownership in Ottawa-based cellulosic ethanol producer Iogen Energy Corp. and is "considering" investing in a full-scale commercial ethanol plant based on Iogen's proprietary technology. "This transaction sets the stage for successful large-scale cellulosic ethanol production." Officials from the ethanol industry warned against abandoning ethanol altogether, arguing that investment in first generation corn-based ethanol paves the way for second-generation cellulosic ethanol — produced by companies such as Iogen — that uses waste, not food, and is much more sustainable over the long term.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (NUAN), target $24.

RBC Capital:
- Rated (CLWR) Outperform, target $17.

Night Trading
Asian Indices are -1.25% to +.25% on average.
S&P 500 futures +.33%.
NASDAQ 100 futures +.50%.

Morning Preview
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Earnings of Note
Company/EPS Estimate
- (ABT)/.78
- (AMR)/-1.39
- (GCI)/1.04
- (NITE)/.34
- (STJ)/.55
- (WFC)/.50
- (MI)/-1.56
- (KMP)/.54
- (ADS)/1.00
- (PLCM)/.33
- (EBAY)/.41
- (YUM)/.42
- (XLNX)/.36
- (RECN)/.28
- (PJC)/-.17
- (DAL)/.10

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- The Consumer Price Index for June is estimated to rise .7% versus a .6% gain in May.
- The CPI Ex Food & Energy for June is estimated to rise .2% versus a .2% increase in May.

9:00 am EST
- Net Long-term TIC Flows for May are estimated to fall to $70.0 billion versus $115.1 billion in April.

9:15 am EST
- Industrial Production for June is estimated to rise .1% versus a -.2% decline in May.
- Capacity Utilization for June is estimated at 79.4% versus 79.4% in May.

10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil drawdown of -2,200,000 barrels versus a -5,840,000 barrel decline the prior week. Gasoline supplies are estimated to fall by -100,000 barrels versus a 909,000 barrel increase the prior week. Distillate inventories are expected to rise by 2,000,000 barrels versus a 1,816,000 barrel increase the prior week. Finally, Refinery Utilization is estimated to rise by .05% versus a -.07% decline the prior week.

1:00 pm EST
- The NAHB Housing Market Index for July is estimated at 18 versus 18 in June.

2:00 pm EST
- Minutes of June 24-25 FOMC Meeting.

Other Potential Market Movers
- The Fed’s Bernanke speaking, Fed’s Hoenig speaking, weekly MBA Mortgage Applications report, (LDK) analyst meeting, (RTEC) analyst meeting and SEMICON West could also impact trading today.

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

Stocks Finish Lower, Weighed Down by Bank, Commodity and Insurance Shares

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In Play

Stocks Mostly Lower into Final Hour on Financial Sector Concerns, Global Growth Worries

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Software longs, Biotech longs, Semi longs, Gaming longs and Commodity shorts. I covered some of my (IWM)/(QQQQ) hedges and some of my (EEM) short this morning, thus leaving the Portfolio 75% net long. The tone of the market is mixed as the advance/decline line is slightly lower, most sectors are rising and volume is heavy. Investor anxiety is high. Today’s overall market action is mildly bullish. The VIX is falling 4.25% and is still high at 27.33. The ISE Sentiment Index is very low at 78.0 and the total put/call is high at 1.14. Finally, the NYSE Arms has been running below average most of the day and is currently .63. The Euro Financial Sector Credit Default Swap Index is rising 4.74% today to 92.38 basis points. This index is up from a low of 52.66 on May 5^th, but down from 129.46 basis points on March 20^th. The North American Investment Grade Credit Default Swap Index is rising 3.4% today to 140.69. The TED spread is rising 5.23% to 141.0. Growth stocks are outperforming value stocks by a very wide margin again today. Many small/mid-cap growth stocks are especially strong. The market appears to have made a tradable low this morning. Nikkei futures indicate a -20 open in Japan and DAX futures indicate an +100 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, falling energy prices and bargain-hunting.

Today's Headlines

Bloomberg:
- Crude oil tumbled more than $6 a barrel in New York amid concern that a slower U.S. economy will curtail demand for oil and gasoline.
- The U.S. Securities and Exchange Commission will take emergency action today to limit the ability of traders to bet on a decline in the shares of Freddie Mac(FNM), Fannie Mae(FNM) and brokerages, the agency's chairman said.
- Volkswagen AG, Europe's biggest carmaker, plans to build a plant in Chattanooga, Tennessee, resuming manufacturing in the U.S. to help end more than five years of losses in the world's largest automobile market.
- OPEC said it expects demand for its members’ crude will fall next year as the global economy slows. OPEC also cut its 2008 global oil demand forecast for a sixth month on lower demand for transport fuel in the US. The call on OPEC’s crude next year will average 31.2 million barrels a day, a drop of 710,000 barrels a day from the forecast for 2008. “The decline in demand for OPEC crude combined with increasing OPEC capacity should further ease market conditions and likely help moderate prices,” the report said.
- Investors should increase their holdings of agency debt after a Treasury Dept. proposal made the government’s backing of Fannie Mae(FNM) and Freddie Mac(FRE) more explicit, according to RBS Greenwich Capital Markets. “The Sunday announcement out of the Treasury has changed the landscape and narrowed the gap between the ‘implied’ government support long enjoyed by Fannie and Freddie and the ‘full faith & credit’ status of Treasuries,” Hackel wrote.
- Investors should sell commodities stocks because a slowing global economy will cut demand for raw materials such as copper, nickel and corn, according to strategists at Merrill Lynch(MER) and Morgan Stanley(MS). “Given forecasts of slowing global growth and terrible stock market performance from the emerging markets, we believe we may have witnessed the peak in this commodity cycle,” Merrill US sector strategist Brian Belski wrote.
- Corn and soybean futures fell for the second day on speculation that favorable weather in parts of the U.S. Midwest will boost crop prospects.

Wall Street Journal:
- The SEC has sent subpoenas to more than 50 hedge funds as part of its investigation into whether individuals spread false rumors to manipulate shares of two Wall Street firms. The subpoenas, sent as recently as Monday, are seeking trading and communications data related to short-selling and options trading in Bear Stearns or Lehman Brothers(LEH).

NY Times:
- Obama Will Meet Palestinian Leaders in the West Bank.

NY Post:
- Lehman Brothers(LEH) is considering plans to privatize.

SmartMoney:
- This Real Estate Rout May Be Short-Lived.

Financial Times Deutschland:
- The BDI federation of German industry expects German economic growth to slow “rapidly” this year and next. High energy prices will hurt the consumer climate and company investment, according to the report.

Central Television:
- Shenzhen’s home foreclosures increased in the past few months after property prices in the southern Chinese city slumped. Some homeowners stopped paying their existing mortgages after new house prices fell by 36 percent between October and June, preferring instead to buy other apartments at lower prices, CCTV said. A further 20% drop in property prices may trigger foreclosures worth $9.2 billion, about 30% of Shenzhen banks’ total mortgage lending, CCTV said.

Kyodo News:
- An inflow of speculative funds is driving record oil and materials costs, citing a report by Japan’s Ministry of Trade, Economy and Industry. The white paper said that the futures price of corn in Chicago was $6 per bushel as of May this year, only about half of which was explainable by the supply and demand balance.

Iran Daily:
- Iran’s annual trade with China is expected to reach $30 billion in 2008, citing a Chinese Foreign Ministry official. Iran and China’s current annual trade now amounts to about $16 billion.

Bear Radar

Style Underperformer:

Large-cap Value -1.05%

Sector Underperformers:

Coal irlind (-4.86%), Energy (-2.54%) and Oil Service (-2.30%)

Stocks Falling on Unusual Volume:

VPHM, CGV, GNW, ACAS, MBFI, AAUK, PAAS, FTEK, ACGY

Stocks With Unusual Put Option Activity:

1) AN 2) PXP 3) PAYX 4) AES 5) NRG