Stocks Finish at Session Lows, Weighed Down by Financial, Airline, Steel and Gaming Shares

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- The cost of default protection on Australian corporate bonds fell from a record high, credit- default swaps show. It also fell in Japan. The Markit iTraxx Australia Series 9 Index was about 23 basis points lower at 185 at 9:54 a.m. in Sydney after earlier trading at 195 basis points, ABN Amro Holding NV prices show. The Markit iTraxx Japan index fell 21 basis points to 159 as of 9:05 a.m. in Tokyo, according to prices from Morgan Stanley.
- Samsung Electronics Co., the world's second-largest chipmaker, made a $5.85 billion hostile bid for SanDisk Corp.(SNDK) to widen its lead in the market for semiconductors that store pictures and music in cameras and mobile phones. Samsung offered $26 in cash for each SanDisk share, the Suwon, South Korea-based company said today in a statement. That's 73 percent more than SanDisk's latest closing price, leading the stock to jump 56 percent in after-hours trading.
- Morgan Stanley’s(MS) third-quarter profit fell less than estimated as revenue from stock trading and an asset sale cushioned a drop in the firm's investment banking and fixed-income businesses. ``We are very convinced and confident in the broker-dealer model,'' Morgan Stanley Chief Financial Officer Colm Kelleher said in a telephone interview. ``The market unfortunately is based on rumor and fear.'' On a conference call with analysts, he said Morgan Stanley's risk of losses from Lehman and AIG were ``not material.''
- Barclays Plc, the U.K.'s third- biggest bank, will acquire the North American investment-banking business of bankrupt Lehman Brothers Holdings Inc. for $1.75 billion, two days after abandoning plans to buy the entire firm. Barclays is paying $250 million in cash for the Lehman businesses and $1.5 billion for the securities firm's New York headquarters and two data centers, the London-based bank said in a statement on its Web site today. The operations employ about 10,000 people.
- Emerging-market stocks plunged the most in 11 years, currencies fell and the cost of insuring developing-nation bonds surged as rising lending rates and tumbling commodities prompted investors to sell riskier assets. The MSCI Emerging Markets Index fell 4.7 percent to 786.99 at 4:17 p.m. New York time, the lowest level since October 2006. The measure earlier tumbled 6.3 percent for the biggest drop since October 1997. The measure lost 34 percent in 2008 before today, compared with a 19 percent decline for the Standard & Poor's 500 Index.
- Gold fell as investors sold commodities to raise cash and cover losses in other markets. Silver fell to a two-year low and platinum dropped the most since at least 1986. Platinum futures for October delivery plummeted $107.70, or 9.2 percent, to $1,068.50 an ounce in New York.

Wall Street Journal:
- The U.S. government announced an emergency rescue of American International Group Inc.(AIG) -- one of the world's biggest insurers -- signaling the intensity of its concerns about the danger a collapse could pose to the financial system.

MarketWatch.com:
- Offshore oil and gas exploration gets newfound attention from both parties.

NY Times:
- There is a tiny shred of good news for Lehman Brothers(LEH), the beleaguered investment bank: one of the investments of its Healthcare Venture Capital arm, a biotech company called Fluidigm, is set to go public this week. That is, if the markets cooperate.

CNBC.com:
- Morgan Stanley(MS) officials are weighing whether the firm should remain independent or merge with a bank given the recent turbulence in the company's stock, CNBC has learned.

USA Today.com:
- Officials in North Carolina, Texas and Florida are investigating claims of price gouging as gasoline prices soared across large swaths of the nation in the wake of Hurricane Ike.

Daily Herald:
- Home Depot(HD) plans price cuts to bring back shoppers.

Reuters:
- The U.S. House of Representatives passed legislation on Tuesday lifting a longstanding congressional moratorium on offshore drilling.

Financial Times:
- Russia authorities halted trading on the country's stock exchange on Tuesday after it plunged 17 per cent in a broad-based sell-off. "This is a good old-fashioned panic", said Steven Dashevsky, head of research at Unicredit in Moscow. "It doesn't feel like there is anyone domestically that can put the brakes on." Margin calls on local investors who have used stocks as collateral for loans continued to drive sales, as emerging market funds faced growing redemptions.
- The growth prospects of the global hedge fund market – worth almost $2,000bn (£1,400bn) – are in doubt. Funds are being forced to de-lever and sit on large cash balances as the prime brokers they largely depend on for financing face severe pressure. The collapse of Bear Stearns and Lehman Brothers has forced hundreds of hedge funds that used the banks as their prime brokers to look elsewhere for their funding and support. It has also put pressure on funds to rein in the amount of leverage they employ, limiting their ability to outperform broader indices and causing investors to question the fees they charge. About 100 hedge funds that used Lehman as their prime broker had positions held via the bank frozen on Monday as administrators took charge of the London business and the US holding company filed for bankruptcy.

Guardian:
- Google(GOOG) shows first Android phone in London.

The Independent:
- Britain’s Alistair Darling stopped short of calling for an outright ban on shorting bank shares yesterday, as news emerged that the US government was preparing plans to crack down on the practice. This came on the day that the Liberal Democrat Treasury spokesman, Vince Cable, called for the regulators to outlaw the shorting of banks to stop hedge funds "betting against the taxpayer".

AFP:
- The US government approved $250 million in sales of food products and agricultural equipment to Cuba to help it recover from Hurricanes Ike and Gustav, bypassing an embargo on the country.

The West Australian:
- BHP Billiton(BHP) has warned that its profits are exposed to any economic slowdown in China. The warning was contained in the group’s US annual report and breaks with the habit of the past five years of talking up the strength of Chinese demand.

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

Piper Jaffray:
- Rated (CKEC) Buy, target $6.
- Rated (NCMI) Buy, target $14.

Night Trading
Asian Indices are -.25% to +2.0% on average.
S&P 500 futures +.57%.
NASDAQ 100 futures +.53%.

Morning Preview
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Earnings of Note
Company/EPS Estimate
- (GIS)/.88
- (DBRN)/.29
- (CKR)/.19
- (MLHR)/.55

Economic Releases
8:30 am EST
- The Current Account Deficit for 2Q is estimated to widen to -$180.0 billion versus -$176.4 billion in 1Q.
- Housing starts for August are estimated to fall to 950K versus 965K in July.
- Building Permits for August are estimated to fall to 928K versus 937K in July.

10:35 am EST
- Bloomberg consensus estimates call for a weekly crude oil drawdown of -3,500,000 barrels versus a -5,828,000 barrel decline the prior week. Gasoline inventories are expected to fall by -3,500,000 barrels versus a -6,462,000 barrel decrease the prior week. Distillate supplies are estimated to fall by -1,900,000 barrels versus a -1,252,000 barrel fall the prior week. Finally, Refinery Utilization is expected to fall by -2.0% versus a -10.41% decline the prior week.

Upcoming Splits
- None of note

Other Potential Market Movers
- The weekly MBA mortgage applications report, (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 and the BMO Capital Markets Real Estate Conference could also impact trading today.

BOTTOM LINE: Asian indices are higher, boosted by technology and financial shares in the region. I expect US equities to open modestly higher and to maintain gains into the afternoon. The Portfolio is 100% net long heading into the day.

Stocks Finish at Session Highs, Boosted by Airline, REIT, Financial and Commodity Shares

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In Play

Stocks Surging into Final Hour on Less Financial Sector Pessimism, Short-Covering, Lower Commodity Prices

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Internet longs, Biotech longs, Semi longs and Medical longs. I covered all my (IWM)/(QQQQ) hedges and took some profits in my (EEM) short this morning, thus leaving the Portfolio 100% net long. The tone of the market is mildly positive as the advance/decline line is slightly higher, most sectors are rising and volume is heavy. Investor anxiety is very high. Today’s overall market action is very bullish. The VIX is falling 3.9% and is very high at 30.45. The ISE Sentiment Index is very low at 90.0 and the total put/call is very high at 1.32. Finally, the NYSE Arms has been running around average most of the day, after peaking at 1.78 this morning, and is currently .44. The Euro Financial Sector Credit Default Swap Index is +13.44% today to 140.50 basis points. This index is up from a low of 52.66 on May 5^th and at a new high. The North American Investment Grade Credit Default Swap Index is +33.9% at 200.42 basis points. The TED spread is rising 2.97% to 2.07 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is plunging another 14 basis point to 1.63%, which is down 99 basis points in about eight weeks and at the lowest level since January 2003, when deflation was the concern. The Fed’s decision today to leave rates unch. leads me to conclude that at the very least a partial resolution to the AIG situation is imminent. I am somewhat surprised the equity market isn’t up more on the decision. This is also a big positive for the US dollar and should lead to further commodity weakness after a bounce from oversold levels. This should also further boost demand for US assets. The S&P Goldman Ag Spot Index is especially weak today, falling another 4.4%. This index is down 26.6% from its March 12^th high. Future inflation readings should continue to register meaningful deceleration. Russian stocks plunged another 11.5% today and are now down 51% for the year. I continue to believe developed markets will substantially outperform most emerging markets for several years. The (XLF) is still right at the bottom end of the trading range it has been in($19.50-$23.50) since July 17^th , which is a big positive considering recent news. Many market leading growth stocks that aren’t dependent on a vigorous global economy are substantially outperforming again today. Nikkei futures indicate a +100 open in Japan and DAX futures indicate an +33 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, less forced selling, lower commodity prices, diminishing financial sector pessimism and bargain-hunting.

Today's Headlines

Bloomberg:
- The Federal Reserve left its main interest rate at 2 percent, rebuffing calls by some investors for a cut after Lehman Brothers Holdings Inc.'s(LEH) bankruptcy shook markets worldwide.
- The Federal Reserve is considering extending a ``loan package'' to American International Group Inc.(AIG), the insurer facing a cash shortage, according to a person familiar with the negotiations.
- Cisco Systems Inc.(CSCO) Chief Executive Officer John Chambers said he's ``never'' been more comfortable with his long-term forecast, reassuring investors that network- equipment demand will hold up amid an economic slowdown.
- American International Group Inc.(AIG) investors led by former Chief Executive Officer Maurice ``Hank'' Greenberg may consider taking control of the insurer through a proxy fight or buyout.
- The US dollar rose against the euro after the Federal Reserve left its target lending rate unchanged at 2 percent, saying growth and inflation risks are both ``significant'' concerns.
- Crude oil tumbled, dipping below $91 a barrel and taking its two-day decline to more than $10 on concern that turmoil on Wall Street may weaken the global economy and reduce demand. Oil has declined 4.5 percent this year and dropped 38 percent from the record $147.27 a barrel reached on July 11. The group ``will take action if they see continue pressure for prices to fall below $80,'' John Sfakianakis, chief economist at Saudi British Bank said in an interview in London today. ``I think they are more than fine if prices stay around $80-90 in the next few months.'' Lehman Brothers has been suspended from energy and commodities trading in London.
- Corn fell the most allowed by the Chicago Board of trade and soybeans dropped the most since March on speculation that a deepening global credit squeeze will slow economic growth, eroding demand for food, feed and fuels made from the two biggest U.S. crops. Before today, corn tumbled 30 percent from a June record, and soybeans dropped 28 percent from the all-time high in July.
- The risk of US companies defaulting on their debt fell from a record, according to traders of credit default swaps. Contracts on the Markit CDX North America Investment Grade Index of 125 companies in the US and Canada fell 11 basis points to 204 at 11:01 am in NY.
- Richard Bove, an analyst at Ladenburg Thalmann, says Goldman(GS) earnings ‘not a good number’. (video)
- Goldman Sachs Group Inc.(GS) said its value at risk in commodities rose in the third quarter from the previous quarter. Goldman’s average value at risk in commodities, a measure of how much the firm estimates it could lose in a single day, rose to $51 million in the three months ended Aug. 29, the firm said today. That compares with $48 million in the second quarter and $24 million in the third quarter last year. Morgan Stanley(MS) had an average value at risk to commodities of $41 million a day in the three months ended May 31. Net revenues at Goldman’s Fixed Income, Currency and Commodities unit dropped 67% to $1.6 billion.

Wall Street Journal:
- Cray Inc. is introducing a $25,000 low-end mode which will handle tasks beyond a desk-top system but which don’t require a supercomputer, citing Ian Miller, a senior vp.

NY Times:
- Democrat Representative Charles B. Rangel met behind closed doors with House leaders on Monday evening, as he faced increasing pressure to relinquish his position as chairman of the Ways and Means Committee.

Eurekahedge:
- The first half of 2008 has seen not only the lowest hedge fund launch activity (272 funds), but also the highest number of liquidations (243 funds) during any comparable period over the past nine years.

Reuters:
- The head of Toshiba Corp's semiconductor division said on Tuesday he was interested in SanDisk (SNDK), its partner in the flash memory chip business.

Handelsblatt:
- Munich Re CEO Bomhard said he is interested in acquiring parts of NY-based American International Group(AIG).

AFP:
- France will back the US to press for a fourth round of sanctions against Iran at the UN Security Council over its nuclear program, citing the French Foreign Ministry.

RIA Novosti:
- Russia’s budget will break even next year if the price of oil averages $70 a barrel, citing Finance Minister Alexei Kudrin. “We are at the limits of our budget parameters,” Kudrin said.

Globe and Mail:
- Once viewed as a safe haven, crude oil has lost its luster as investors bet that the crisis in financial markets will hurt an already weakened global economy and drive down petroleum demand. At the same time, speculators who piled into oil and other commodities on the way up have reversed course, as brokerages and hedge funds are being forced to liquidate those positions to buttress their balance sheets, traders said yesterday. Lehman Brothers Inc. and Merrill Lynch & Co. Inc. are both major players in the crude oil markets, and both companies are expected to unwind their positions after Lehman sought bankruptcy protection and Merrill agreed to be acquired by Bank of America. "Every time we have one of these financial crises, we have managed to lose about one million barrels per day of demand in a very short amount of time. And that's what is scaring the [crude] markets," Ms. Novak said. Many analysts expect crude prices to continue their slide - to perhaps as low as $75 a barrel, where it sat this time last year.

Haaretz:
- Former Finance Ministry Director General David Brodet said on Monday that Israel's economy will continue to weaken into 2009.

Sarmayeh:
- Iran’s import costs rose by as much as 45% because of international sanctions against the country, citing an industry official.

Bear Radar

Style Underperformer:

Large-cap Growth (-.38%)

Sector Underperformers:

HMOs irlind (-4.06%), Coal (-3.26%) and Utilities (-2.78%)

Stocks Falling on Unusual Volume:

UBS, CAJ, AMP, CEG, ROS, VIP, AVAV, HES, SU, RRI, ICE, PETD, DELL, ACGY, NTRS, RVBD, CLNE, CTRP, CEDC, BCE, GS, SBR, VCO and OKS

Stocks With Unusual Put Option Activity:

1) MU 2) CPN 3) CIT 4) CB 5) BUD