Monday Watch

Weekend Headlines
Bloomberg:
- Crude oil fell to a six-month low in New York and gasoline tumbled amid signs that refineries along the Gulf of Mexico coast will soon resume operations after escaping major damage from Hurricane Ike. Almost 20 percent of the U.S.'s oil refining capacity was shut, limiting fuel deliveries and prompting the Department of Energy to release 309,000 barrels from its strategic reserves. New York Mercantile Exchange electronic trading opened early to allow traders to respond to Ike. ``It looks like we've dodged another bullet,'' said Peter Beutel, president of energy consultant Cameron Hanover Inc. in New Canaan, Connecticut. ``The refineries in the Houston area seem to have come out of the storm remarkably intact.'' Futures touched $98.55/bbl., the lowest since Feb. 26.
- Lehman Brothers Holdings Inc.(LEH) prepared to file for bankruptcy after Barclays Plc and Bank of America Corp. abandoned talks to buy the U.S. securities firm and Wall Street prepared for its possible liquidation.
- The Federal Reserve widened the collateral it accepts for loans to Wall Street bond dealers as the financial industry braced for a Lehman Brothers Holdings Inc.(LEH) bankruptcy filing.
- The U.S. Securities and Exchange Commission is unlikely to expand to every stock the curbs imposed two months ago on naked short sales, three people familiar with the matter said. Regulators are instead likely to focus on measures that would strengthen requirements that brokers deliver shares they sell short, said people familiar with the agency's thinking. ``The SEC is very likely going to get some negative comments from retail investors, but institutional investors that employ significant short-selling strategies, including hedge funds, are going to be very glad,'' said Sean O'Malley, a former SEC lawyer and now a partner at Goodwin Procter LLP in New York. The American Bankers Association had urged the SEC to broaden the ban to include all publicly traded banks and bank holding companies. The Managed Funds Association, the largest hedge fund industry group, asked regulators not to renew the order, saying it damps legitimate trading.
- Hogs fell to a six-month low on signs of slowing demand for pork in China and rising inventories of the meat in the U.S. U.S. exporters sold 409.5 million pounds of pork in July, down 12 percent from the previous month and the second straight monthly decline, the Department of Agriculture said yesterday in a report. China, including Hong Kong, bought 72.9 million pounds, down from 140.1 million in June, USDA data show.
- Electronic Arts Inc.(ERTS) the second- largest video-game publisher, said it has ended discussions with Take-Two Interactive Inc. and won't make a proposal to buy the company.
- When it comes to containing Russia, the invisible hand of the markets may be the West's most potent weapon. Tightening access to international credit and mounting stock losses are hurting Russian billionaires as well as state- owned corporations, prompting calls by businessmen to heed Western complaints over Kremlin policy in Georgia. The country's biggest business association, the Russian Union of Industrialists and Entrepreneurs, will raise the issue today at a meeting with President Dmitry Medvedev, said Igor Yurgens, a board member and adviser to Medvedev.
- Asian currencies posted a weekly decline, led by Taiwan's dollar and Indonesia's rupiah, as overseas investors pulled funds out of the region's stocks. Overseas investors were net sellers of Taiwan's stocks for nine of the last 11 trading days, selling NT$82.8 billion ($2.58 billion) more than they bought during that period as the Taiex index declined 11.7 percent. The peso dropped to the lowest level in a year as foreign funds sold Philippine shares every day this month. Fund managers sold $397.2 million more Philippine bonds and stocks than they bought for the first seven months of the year, compared with $3.6 billion in net purchases in the same period a year earlier, data from the central bank showed. ``The peso's decline is driven by investors reducing their exposures in emerging markets including the Philippines,'' said Antonio Espedido, treasurer at China Banking Corp. in Manila.
- Persian Gulf shares fell, led by banks and real-estate companies, as international investors exited the market amid a drop in oil prices and a rising dollar.
- Walgreen Co.(WAG), the largest U.S. pharmacy chain, offered to buy Longs Drug Stores Corp.(LDG) for $3 billion in an attempt to scuttle CVS Caremark Corp.'s agreement to acquire the California retailer.
- Stanley Fink, the former deputy chairman of hedge fund managers Man Group Plc, has joined commodities trader International Standard Asset Management as chief executive officer.
- American International Group Inc.(AIG), the largest U.S. insurer, may move up plans to raise capital or sell assets after the shares plunged 46 percent this week, said a person familiar with the company. Chief Executive Officer Robert Willumstad may announce the reorganization before his Sept. 25 deadline, said the person, who declined to be named because the New York-based insurer hasn't made an official statement.

Wall Street Journal:
- A group of global banks and securities firms announced late Sunday a $70 billion loan program that financial companies can tap to help ease a credit shortage that threatens global financial markets.
- Insurer American International Group Inc.(AIG), succumbing to relentless investor pressure that drove its shares down 31% on Friday alone, is pulling together a survival plan that includes selling off some of its most valuable assets, raising more capital and possibly going to the Federal Reserve for help, people familiar with the situation said.

MarketWatch.com:
- The retreat of energy prices could be temporary, of course, but policymakers will be quietly popping the champagne during the closed-door meeting of the Federal Open Market Committee on Tuesday. The last thing policymakers want now is to be compelled to raise overnight interest rates to fight inflation. The FOMC announcement should come around 2:15 p.m. on Tuesday.

CNBC.com:
- Merrill Lynch(MER), the world's largest broker, agreed to be acquired by Bank of America(BAC) for $29 a share, or $43.5 billion, after being pressured into a deal by federal regulators.

NY Times:
- Some investors are afraid that hedge fund managers like David Einhorn will take advantage of the climate of fear stirred up by the troubles of Lehman(LEH) to single out other weak financial firms whose declining share prices would bring them rich rewards. Other hedge fund managers recognize the dangers and the harm that is befalling bank employees who have been paid in their companies’ stocks. “My children, their playmates’ fathers work at Lehman,” said one manager who is short Lehman and asked to remain anonymous, citing the fragility of the situation. “Obviously I had nothing to do with what happened, and the idea that I profited, and they got clobbered, and I’ve got to see them on Monday is awkward. I feel badly for them.”

Washington Post:
- Quit Doling Out That Bad-Economy Line. The economy just isn’t that bad. I imagine that's what Charles Dickens would conclude about the current condition of the U.S. economy, based on the relentless drumbeat of pessimism in the media and on the campaign trail. It's a virus -- and it's spreading. Do a Google News search for "since the Great Depression," and you come up with more than 4,500 examples of the phrase's use in just the past month. The pessimists are up against an insurmountable reality: In the last reported quarter, the U.S. economy grew at an annual rate of 3.3 percent, adjusted for inflation. That's virtually the same as the 3.4 percent average growth rate since -- yes -- the Great Depression. According to the MBA, 6.4 percent of mortgages are delinquent to some extent, and 2.75 percent are in foreclosure. During the Great Depression, according to Wheelock's research, more than 50 percent of home loans were in default. MBA data show that today's foreclosures are concentrated in that small fraction of U.S. homes financed by subprime mortgages. Such homes make up only 12 percent of all mortgages, yet account for 52 percent of foreclosures. According to the latest report from the National Association of Realtors, the median price of an existing home is up 8.5 percent from the low of last February. And according to the U.S. Census Bureau, the median price of a new home is up 1.3 percent from the low of last December. According to the FDIC, there have been a total of 13 bank failures in 2007 and so far into 2008. Since the Great Depression, the average number of bank failures each year has been 94. Some economic indicators -- export growth and non-defense capital goods orders such as industrial machinery, for example -- are running at levels associated with brisk expansion. Others are running at middling levels, such as the closely followed Institute for Supply Management manufacturing index. But it's actually difficult to find many that are running at truly recessionary levels.What does it say about our nation that it has become political suicide to state the good news that our economy is not in recession? (very good article)

Forbes.com:
- Outflows from emerging market bond and equity funds and exchange-traded funds reached $29.5 billion over the past three months, the highest level since at least 1995. Investors are rushing to the exits.

Politico:
- In the wake of Sarah Palin, John McCain has opened up a 15-point lead among independents, according to a new Gallup Poll.

Seattle Times:
- Washington Mutual Inc.(WM) CEO Alan Fishman, who was chosen as the company’s leader last week, said he will be able to turn the company around.
- Weyerhaeuser(WY) Real Estate Co.’s new CEO, Larry Burrows, said he expects the company, one of the largest US homebuilders, to make it through the housing slump and he is “bullish.” “The outlook for WRECO is tremendous,” Burrows said.

CNNMoney.com:
- Strong sales at Boeing(BA) had made aerospace a bright spot in a weak economy. But all that is on hold as Boeing(BA) workers prepare for a long strike.

Seattle Post-Intelligencer:
- Boeing Co.(BA) is “open to finding a way” to end a strike by machinists, Boeing Commercial Airplanes CEO Carson told managers and human-resources employees. Carson said it was “deeply disappointing” that the machinists union turned down a Boeing offer that he called “truly outstanding.”

Reuters:
- Officials from the New York Insurance Department and executives of American International Group Inc were in talks on Sunday to find a way for the embattled insurer to boost capital and protect policyholders.
- Slate, the online news and opinion magazine owned by The Washington Post Co (WPO), plans to join a bustling business news market with an analysis and commentary site expected to launch this summer. "The Big Money" aims to use wit and irreverence to explain the arcana of Wall Street, the same way Slate has done with general and political news, Editor James Ledbetter told Reuters in an interview.
- Paulson said the weekend's discussions made clear that market participants and regulators across the globe recognize the need to support market stability as they address challenges. "I am committed to working with regulators and policy makers -- including Congress - to take necessary and appropriate steps to maintain the stability and orderliness of our financial markets. And I will engage with regulators and policymakers around the world to that end."

Financial Times:
- A backlog of $45bn in foreign debt held by Russian companies and banks remains to be refinanced by the end of the year amid increasingly difficult conditions as western investors reprice the risk of doing business there.

TimesOnline:
- About 200 funds have collapsed this year. Of those left, 61% of the 2,795 managing more than $100m and tracked by hedge fund news website HedgeFund.net’s database, are losing money. Just like the venture capital firms before them, hedge funds are finding the easy money that once fuelled them is gone. Borrowing is now significantly more expensive and banks, with troubles of their own, are wary of making long-term commitments. The industry that emerges from this downturn looks sure to be significantly smaller than the one that went in. These collapses may well attract government scrutiny, given the amount of pension money invested in these unregulated firms.
- Today the $900m RAB Special Situations fund faces the threat of being liquidated unless investors agree to lock in their money for three years. “If RAB Special Situations starts selling off its entire portfolio the ripples will be felt across AIM, as well as on Toronto stock exchange and in Australia,” said one stockbroker. “A lot of people will get hurt.” RAB Capital was the first London hedge-fund manager to seek a public listing, joining AIM in early 2004.
- Unemployment in Britain will surge by 450,000 to 2.12 million by the end of next year, a level not seen since 1997, when Labour came to power, as the country endures its first recession since the early 1990s, the CBI forecasts today.
- The world’s largest oil companies will converge on London next month for a chance to re-enter Iraq for the first time in more than three decades.

Clarin:
- Argentina’s Economy Ministry will send to Congress a 2009 budget proposal that forecasts inflation at 8% and a peso rate of 3.19 pesos per dollar. The government also included a cut of $1 billion in energy subsidies.

Eleftheros Typos:
- Europe’s “unusually uncertain” economic prospects may increase unemployment, European Union Monetary Affairs Commissioner Joaquin Almunia said. “While the labor market has held up well until now, the situation could change,” Almunia said. Faster inflation is putting an increasing strain on the economy, and the prospects for the second half of 2008 and the start of 2009 are “not very good,” Almunia said.

Kargozaraan:
- Iran’s former president Mohammad Khatami attacked the “aggressive” foreign policies of Mahmoud Ahmadinejad’s government, which he said are hurting the country. Khatami also rejected as “wrong” the statistics presented by Ahmadinejad in a meeting with officials last week to gauge the economic success of his government.

Weekend Recommendations
Barron's:
- Made positive comments on JEC, BTU, MIDD, MFE and IBM.

Night Trading
Asian indices are -2.25% to -1.0% on avg.
S&P 500 futures -3.37%.
NASDAQ 100 futures -2.70%.

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Earnings of Note
Company/Estimate
- (TITN)/.17
- (PLL)/.60

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- Empire Manufacturing for September is estimated to fall to 1.0 versus 2.8 in August.

9:15 am EST
- Industrial Production for August is estimated to fall .3% versus a .2% increase in July.
- Capacity Utilization for August is estimated to fall to 79.6% versus 79.9% in July.

Other Potential Market Movers
- The (HPQ) analyst meeting, (RVBD) vision day, (ATVI) analyst meeting, (WNS) analyst meeting and Bank of America Investment Conference could also impact trading today.

BOTTOM LINE: Asian indices are lower, weighed down by financial and industrial shares in the region. I expect US stocks to open sharply lower and to rally into the afternoon, finishing mixed. 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 some significant corporate earnings reports scheduled for release this week.

Economic reports for the week include:

Mon. – Empire Manufacturing, Industrial Production, Capacity Utilization

Tues. – Consumer Price Index, Net Long-term TIC Flows, NAHB Housing Market Index, FOMC Rate Decision, weekly retail sales reports

Wed. – Weekly MBA Mortgage Applications report, Current Account Deficit, Housing Starts, Building Permits

Thur. – Initial Jobless Claims, Philly Fed., Leading Indicators

Fri. – None of note

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

Mon. – Titan Machinery(TITN)

Tues. – CBRL Group(CBRL), Goldman Sachs(GS), Darden Restaurant(DRI), Best Buy(BBY), Kroger(KR), Adobe Systems(ADBE)

Wed. – Dress Barn(DBRN), Herman Miller(MLHR), CKE Restaurants(CKR), General Mills(GIS), Morgan Stanley(MS)

Thur. – ConAgra(CAG), FedEx Corp.(FDX), Palm Inc.(PALM), Oracle Corp.(ORCL), Cintas Corp.(CTAS), Carnival Corp.(CCL)

Fri. – None of note

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

Mon. – (HPQ) analyst meeting, (RVBD) vision day, (ATVI) analyst meeting, (WNS) analyst meeting, Bank of America Investment Conference

Tue. – (AIQ) investor day, (ATR) analyst day, (MNKD) analyst day, (CSCO) financial analyst conference, (TOT) mid-year review, CSFB Chemical Conference, BB&T Consumer Softlines Conference, Bank of America Investment Conference, Jeffries Shipping/Logistics/Offshore Services Conference, RBC Financial Institutions Conference, UBS Global Paper/Forest Products Conference

Wed. – (BRCD) analyst meeting, Goldman Sachs Communications Conference, UBS Global Paper/Forest Products Conference, Jeffries Shipping/Logistics/Offshore Services Conference, CSFB Chemical Conference, Bank of America Investment Conference, Merrill Lynch Global Real Estate Conference, RBC Financial Institutions Conference, BMO Capital Markets Real Estate Conference

Thur. – DA Davidson Engineering/Construction Conference, Calyon Airline Conference, CSFB Chemical Conference, Merrill Lynch Global Real Estate Conference, Goldman Communications Conference

Fri. – DA Davidson Engineering/Construction Conference

BOTTOM LINE: I expect US stocks to finish the week modestly higher on bargain-hunting, less credit market angst, diminishing financial sector pessimism, lower commodity prices, a stronger US dollar, mostly positive economic data 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 1,251 .70 +.76%*

Click here for the Weekly Wrap by Briefing.com.

*5-Day Change

Weekly Scoreboard*

Indices
S&P 500 1,251 .70 +.76%
DJIA 11,421.99 +1.79%
NASDAQ 2,261.27 +.24%
Russell 2000 720.26 +.20%
Wilshire 5000 12,708.52 +.57%
Russell 1000 Growth 526.13 +.92%
Russell 1000 Value 672.97 +.27%
Morgan Stanley Consumer 700.22 +2.15%
Morgan Stanley Cyclical 869.99 +3.28%
Morgan Stanley Technology 525.09 -.39%
Transports 5,074.07 +3.79%
Utilities 459.11 +2.36%
MSCI Emerging Markets 36.10 -2.09%

Sentiment/Internals
NYSE Cumulative A/D Line 41,225 -3.36%
Bloomberg New Highs-Lows Index -666 +37.64%
Bloomberg Crude Oil % Bulls 41.0 -4.65%
CFTC Oil Large Speculative Longs 198,328 +2.47%
Total Put/Call 1.01 +2.02%
OEX Put/Call .64 -27.27%
ISE Sentiment 104.0 +2.97%
NYSE Arms .85 +23.19%
Volatility(VIX) 25.66 +11.27%
G7 Currency Volatility (VXY) 11.57 +.17%
Smart Money Flow Index 8,183.31 +1.40%
AAII % Bulls 29.27 -20.98%
AAII % Bears 54.88 +27.01%

Futures Spot Prices
Crude Oil 101.18 -5.17%
Reformulated Gasoline 276.96 +2.58%
Natural Gas 7.37 -1.19%
Heating Oil 293.91 -1.72%
Gold 764.50 -5.39%
Base Metals 209.78 +.75%
Copper 319.40 +2.34%
Agriculture 384.83 +.36%

Economy
10-year US Treasury Yield 3.72% +2 basis points
10-year TIPS Spread 1.95% -4 basis points
TED Spread 1.35 +31 basis points
N. Amer. Investment Grade Credit Default Swap Index 149.71 +2.54%
Emerging Markets Credit Default Swap Index 288.81 +2.32%
Citi US Economic Surprise Index +46.0 -30.51%
Fed Fund Futures 12.0% chance of 25 cut, 88.0% chance of no move on 9/16
Iraqi 2028 Govt Bonds 72.75 -.26%
4-Wk MA of Jobless Claims 440,000 unch.
Average 30-year Mortgage Rate 5.93% -42 basis points
Weekly Mortgage Applications 496,200 +9.51%
Weekly Retail Sales +1.8%
Nationwide Gas $3.68/gallon +.01/gallon
US Cooling Demand Next 7 Days 17.0% above normal
ECRI Weekly Leading Economic Index 125.97 -.19%
US Dollar Index 78.97 +.04%
Baltic Dry Index 4,800 -15.24%
CRB Index 360.01 -2.09%

Best Performing Style
Small-cap Value +1.22%

Worst Performing Style
Small-cap Growth -.88%

Leading Sectors
HMOs +4.48%
Restaurants +3.24%
Software +3.23%
Banks +3.17%
Road&Rail +3.17%

Lagging Sectors
Disk Drives -3.33%
Coal -5.55%
Insurance -5.64%
Alternative Energy -6.52%
I-Banks -11.60%

One-Week High-Volume Gainers

One-Week High-Volume Losers

*5-Day Change

Stocks Finish Mixed as Strength in Commodity and Construction Shares Offset Weakness in Retail and Insurance Stocks

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In Play

Stocks Slightly Lower into Final Hour on Surging Credit Angst, Financial Sector Pessimism

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Internet longs, Software longs and Medical longs. I added to my (AAPL) long today and added back to an existing commodity short today, thus leaving the Portfolio 100% net long. The tone of the market is mildly negative as the advance/decline line is slightly lower, sector performance is mixed and volume is about average. Investor anxiety is high. Today’s overall market action is slightly bullish. The VIX is rising 5.74% and is high at 25.79. The ISE Sentiment Index is low at 104.0 and the total put/call is above-average at .99. Finally, the NYSE Arms has been running around average most of the day, after peaking at 1.71 this morning, and is currently .83. The Euro Financial Sector Credit Default Swap Index is +1.9% today to 95.17 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 +2.2% at 149.71 basis points. The TED spread is rising 10.14% to 1.33 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 1 basis point to 1.95%, which is down 67 basis points in seven weeks and at the lowest level since August 2003. Oil continues to trade very poorly given the OPEC production cut, recent price declines, today’s US dollar weakness, that it is at the psychologically important $100/bbl. level, a larger-than-expected inventory decline, hurricane worries and recent Iranian shipping sanctions. Refinery Utilization is now at 78.3%, the lowest since the historic hurricanes in 2005 wreaked havoc with the Gulf energy infrastructure and slashed oil demand by refiners. The (XLF) has been very resilient again given recent news. The etf continues to hold its recent range of $19.50-$23.50, which is a broad market positive. The Bank Index(BKX) is actually .73% higher today. Many market leading stocks are significantly outperforming the broad market again today. The broad market, in general, is behaving very well given the spike in credit market angst and financial sector pessimism. There remains massive bull firepower available as the worst case economic scenario is likely factored into most stock prices at current levels. The US dollar will likely pull back a bit further before embarking upon another surge higher next month. The Citi eurozone economic surprise index is now -157.60, while the US economic surprise index is +46.0. Apple(AAPL) may have a bit more downside here, but it isn’t worth waiting on, in my opinion. I suspect those intermediate/long-term investors that are selling around currently levels will greatly regret it by year-end. Nikkei futures indicate an +90 open in Japan and DAX futures indicate an unch. open in Germany on Monday. I expect US stocks to trade modestly higher into the close from current levels on short-covering and bargain-hunting.