Friday Watch

Late-Night Headlines
Bloomberg:
- The cost of protecting Australian corporate bonds from default declined, according to traders of credit-default swaps. The Markit iTraxx Australia index fell 23 basis points to 175 basis points as of 9:42 a.m. in Sydney, Credit Suisse Group prices show.
- Oracle Corp.(ORCL), the world's second- largest software maker, said earnings topped analysts' projections last quarter after clients bought more database programs and renewed contracts for upgrades. The stock rose 6.3 percent after Oracle said today that first-quarter profit, excluding costs such as stock-based compensation, rose to 29 cents a share, beating the 27-cent average of estimates compiled by Bloomberg. Sales for support surged 23 percent and accounted for more than half the total.
- Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke pledged to work through the weekend on a plan requiring legislation aimed at alleviating the financial market turmoil.
- The US dollar gained versus the yen for a second day on U.S. government plans to revive credit markets and prevent further finance industry collapses. ``The plan is likely to be welcomed by the markets and will probably safeguard the U.S. financial system,'' said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France's largest bank by market value. ``This is dollar- supportive.'' ``The last 12 to 18 hours have been an unambiguous good for the financial world and the global economy,'' said Peter Pontikis, a treasury strategist at Suncorp-Metway Ltd. in Brisbane, Australia. ``The first response is the yen isn't an attractive asset now.''
- The U.S. House of Representatives approved legislation that would set speculation limits on agriculture and energy markets and require foreign exchanges to file daily reports on trading activities. The measure would need to pass in the Senate and most likely would need to have a veto-proof majority. Congress is planning to leave at the end of next week to campaign before November elections, which leaves enactment of the measure uncertain. Investment banks, hedge funds and the futures industry association have lobbied hard for the bill's defeat.
- Demand for commodities, which fell into a bear market amid a ``confidence crunch,'' will slow as global growth cools, according to Standard Chartered Plc. ``Commodities will likely trend lower,'' analysts including Helen Henton, the London-based head of commodity research at the bank, said today in a report. The economies of Asia won't be able to ``decouple'' as financial losses and tighter credit markets weigh on growth in China, India and other countries, the Standard Chartered analyst said. Economic weakness and a stronger dollar will pressure commodity prices in the near term, Henton said. ``Global macro-conditions have become less supportive'' for commodity prices, she said. ``Investment demand will be curbed.''

Wall Street Journal:
- Morgan Stanley(MS) CEO John Mack is lobbying lawmakers and regulators to restrain short sellers of the bank’s stock after losing clients in its prime-brokerage unit. The unit, which works with hedge funds, has lost 15 to 20% of the balance it held. Mack has lobbied the SEC, White House Chief of Staff Joshua Bolton and Senator Charles Schumer to halt investors trying to profit if Morgan Stanley’s(MS) stock declines.
- Citigroup Inc.(C), moving to take advantage of the turmoil that is hobbling banks throughout the U.S., is considering making a bid for Washington Mutual Inc.(WM), according to people familiar with the situation. "People view us today as being a source of the solution, instead of part of the problem," Gary Crittenden, Citigroup's chief financial officer, said in an interview.

MarketWatch.com:
- Number of funds falls as credit crunch takes toll. Industry on course for 700 liquidations in 2008, HFR estimates. A total of 147 new single-manager funds were launched in the second quarter, while 157 were liquidated. That brought down the total number of funds for a second quarter in a row - the first time that's happened since HFR began tracking the industry more than a decade ago.
- Republican presidential candidate Sen. John McCain on Thursday called for the firing of Securities and Exchange Commission Chairman Christopher Cox, saying he has "betrayed the public's trust." In an attempt to beef up his economic credentials after taking a few hits earlier this week for saying the nation's "fundamentals are strong" while the stock markets were suffering huge losses, McCain got more aggressive, saying that the SEC was "asleep at the switch" and reiterated his call for tougher oversight of Wall Street. McCain castigated the SEC for letting speculators "turn our markets into a casino," allowing naked short selling and eliminating the uptick rule to protect investors. "Speculators pounded the shares of even good companies into the ground," McCain said. "The chairman of the SEC serves at the appointment of the President and, in my view, has betrayed the public's trust. If I were President today, I would fire him." McCain also called for a Mortgage and Financial Institutions trust, similar to the Resolution Trust Corp. created after the savings and loan scandals of the early 1990s to regulate the industry. Reports said he would release a more detailed economic plan on Friday.

Forbes.com:
- Regulators, law enforcement and major pension funds declared war on short-sellers Thursday as they try to put a stop to the panic gripping Wall Street. New York Attorney General Andrew Cuomo said he would use the state's Martin Act to pursue criminal fraud charges against short-sellers found to be manipulating shares in major financial institutions, including Lehman Brothers (LEH), American International Group (AIG), Goldman Sachs (GS) and Morgan Stanley (MS). His office opened a broad investigation of trading in shares of those companies, which have been badly beaten in the last 10 days. "The markets need to be stabilized," Cuomo said. "One way is to root out short sellers who spread false information." Meanwhile, New York's comptroller's office, joining a growing number of major pension funds, said Thursday it wouldn't lend out shares of Morgan Stanley, Goldman or 17 other financial stocks from its retirement fund's securities lending program. Pensions and other institutions are major sources of stock borrowed by short- sellers to take their trading positions. Big California pensions Calpers and Calsters have also refused to lend out Goldman and Morgan holdings. Calpers is also not lending out Wachovia (WB). The support for Morgan Stanley and Goldman Sachs, in particular, and banks in general, comes a day after Morgan's chief executive John Mack blamed shorts for his firm's faltering stock price. "It's very clear to me that we're in the midst of a market downturn that's controlled by fear and rumor and short-sellers driving down our stock," he said in a memorandum to employees Wednesday. Britain's Financial Services Authority said Thursday it would suspend the ability of traders to short financial company stocks starting at midnight. Starting Tuesday, traders will have to disclose net short positions that make up more than one-quarter of a percent of a company's shares, including positions held as of Friday. The Securities and Exchange Commission is preparing a fresh wave of subpoenas to try to ferret out rumor-mongering, conspiracy or manipulation in financial stocks. Late Wednesday it also said it would try to force hedge funds and investment managers with greater than $100 million under management to disclose their daily short positions. Naturally, the fund industry isn't too keen on that. James Chanos, founder of short-selling oriented Kynikos Associates and head of a fund-lobbying group, said any rule requiring the disclosure of short positions "is akin to the government suddenly requiring Coca-Cola (KO) to disclose their secret formula for free to all their competitors."

ZDNet:
- Amazon.com(AMZN) to offer content delivery service.

Seeking Alpha:
- Hedge Funds May Have Gone Too Far. You simply do not attack Goldman Sachs (GS). Goldman has too many people placed in government. CNBC said Thursday morning, Morgan Stanley (MS) CEO was livid Wednesday and had the ears of people in various arms of the government (he was once considered for SEC commissioner) - essentially if Morgan Stanley goes down, this is blood on your hands. In the end it still comes down to who you know. And I think the government is now fully engaged.

Financial Times:
- US securities regulators were on Thursday night considering a ban on short selling as part of a group of new initiatives to restore calm to the stricken financial markets, people familiar with the situation said. The US Securities and Exchange Commission was discussing a short-selling ban on some or all stocks and an announcement could come as early as Friday, these people said.
- Morgan Stanley (MS) is in talks to sell a stake of up to 49 per cent to China Investment Corp, the state-owned investment fund, as part of the Wall Street firm's efforts to ensure its survival and reverse a slump in investor confidence. People close to the discussions said the investment bank was exploring the stake sale to CIC as an alternative to a merger with Wachovia, the troubled US lender that approached Morgan Stanley on Wednesday.

TimesOnline:
- Speculators and hedge funds have been banned from betting on British banks going bust in a dramatic move by the City’s regulator. The Financial Services Authority hopes that the temporary crackdown will prevent the downward spirals of bank share prices, reduce the likelihood of another Northern Rock-style run and encourage banks to start lending again on better terms.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (ORCL), target $25.
- Reiterated Buy on (CRM), target $70.
- Reiterated Buy on (CELG), target $86.
- Reiterated Buy on (CAG), target $29.

Thomas Weisel:
- Rated (SONC) Overweight, target $18.
- Rated (YUM) Overweight, target $44.

Night Trading
Asian Indices are +2.50% to +5.75% on average.
S&P 500 futures +2.30%.
NASDAQ 100 futures +2.01%.

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Other Potential Market Movers
- The DA Davidson Engineering/Construction Conference could also impact trading today.

BOTTOM LINE: Asian indices are sharply 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 on Heavy Volume, Boosted by Financial, Gaming, Homebuilding and Alternative Energy Shares

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In Play

Stocks Surging into Final Hour on Less Financial Sector Pessimism, Bargain Hunting and Short-Covering

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Computer longs, Internet longs, Medical longs, Retail longs and Gaming longs. I covered all my (IWM)/(QQQQ) hedges and covered some of my (EEM) short today, thus leaving the Portfolio 100% net long. Nikkei futures indicate an +330 open in Japan and DAX futures indicate an +50 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on less financial sector pessimism, short-covering and bargain-hunting.

Today's Headlines

Bloomberg:
- The Democratic-controlled Congress, acknowledging that it isn't equipped to lead the way to a solution for the financial crisis and can't agree on a path to follow, is likely to just get out of the way. Lawmakers say they are unlikely to take action before, or to delay, their planned adjournments -- Sept. 26 for the House of Representatives, a week later for the Senate. While they haven't ruled out returning after the Nov. 4 elections, they would rather wait until next year unless Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke, who are leading efforts to contain the crisis, call for help. One reason, Senate Majority Leader Harry Reid said yesterday, is that ``no one knows what to do'' at the moment. the Democrats opened themselves up for attack with Reid's comments. The Republican National Committee pounced on the Nevada lawmaker for his ``despair,'' and Senator Mel Martinez, a Florida Republican, said his remarks are ``not a way to inspire confidence or begin to turn the tide.'' And there were some calls for at least a bipartisan show of leadership during the crisis.

- Andy Lipow, president of Lipow Oil Assoc. LLC, says oil prices may fall to $80 a barrel. (video)

- Morgan Stanley(MS) and Goldman Sachs Group Inc.(GS), the largest independent securities firms in the U.S., fell for an eighth day in New York trading amid a crisis of confidence in financial companies.

- New York Attorney General Andrew Cuomo is investigating short sellers of Lehman Brothers Holdings Inc., American International Group Inc. and other financial companies to see if investors spread false information to drive down stock prices.

- U.S. Treasury and Federal Reserve officials are considering a ``permanent'' plan to address the financial crisis, said Senator Charles Schumer, who proposed a new agency to pump capital into troubled financial companies.

Wall Street Journal:
- Industrial giant General Electric's(GE) success in financial services, which now provides roughly half its profits, is turning sour.

- Symantec Corp.’s(SYMC) new Norton anti-virus and security software enables computers to run faster and more smoothly while protecting them against malicious software, Walter Mossberg said.

- Lehman Brothers Holdings Inc.'s demise, already damaging to a number of Asian banks, may be inflicting losses on Asian hedge funds, too. Over the past few days, the financial woes of American International Group Inc., a company with extensive business and a long history in Asia, has sent shockwaves through the region's equity and currency markets. However, "for hedge funds, the Lehman bankruptcy is vastly more damaging," says Steve Diggle, portfolio manager at hedge fund Artradis Fund Management in Singapore.

- Studios Hope YouTube Tie Sells Movie.

- Maybe Wal-Mart(WMT) Isn’t So Bad for Small Business After All.

CNBC:

- Treasury Secretary Henry Paulson is working on setting up a government facility to take on bad debts from financial institutions to prevent a worsening of the global credit crisis, Wall Street sources have told CNBC.

Market Watch:

- Securities and Exchange Commission rules that went into effect Thursday designed to stop so-called "naked" short selling could prove to be a boon for a rapidly growing segment of the market for exchange-traded funds. The SEC said it is concerned "about the possible unnecessary or artificial price movements based on unfounded rumors regarding the stability of financial institutions and other issuers exacerbated by 'naked' short selling." The agency is also considering a rule that would require hedge funds to disclose their short positions. However, the more stringent rules on short selling could drive interest in ETFs that allow investors to conveniently short entire segments of the market. The funds use derivatives and other financial instruments to deliver short exposure and leverage. ProShares and Rydex Investments are ETF managers that oversee bearish funds that give the opposite daily return of market indexes, minus fees and expenses. Some of these ETFs also pile on leverage, which magnifies their volatility and results in bigger gains and potential losses for investors. For example, ProShares UltraShort Financials (SKF) is an ETF that gives leveraged, short exposure to the financial sector. Essentially, it gives twice the inverse (opposite) of the daily return of the sector. Therefore, if the tracking index lost 2% during a trading session, the ETF should rise roughly 4%. The fund has seen its trading volume spike this week as the credit-fueled problems in the financial sector have come to a head and some of Wall Street's largest institutions have disappeared overnight. Launched in early 2007, the ETF's daily volume broke through 70 million shares for the first time Monday, and again on Wednesday. ProShares Chairman Michael Sapir in an interview Thursday said the ETF saw its volume bump up earlier this summer when the SEC put a temporary rule in place geared to prevent naked short selling of key financial institutions. Short-selling ETFs allow investors to hedge against losses or profit from market declines without borrowing the underlying stocks. Traders can also get leverage without setting up a margin account.

Barron’s:
- Clamoring For the Uptick Rule: Brokers Beg for Return of Short Selling Reins; Siebert Urges Global Margin Requirements, Disclosure.

Washington Post:

- Despite perceptions that Sen. John McCain has spent more time on the attack, Sen. Barack Obama aired more negative advertising last week than did the Arizona Republican, says a study released yesterday. Seventy-seven percent of the Illinois Democrat's commercials were negative during the week after the Republican National Convention, compared with 56 percent of the spots run by McCain. For all the talk of an expanded electoral map, both campaigns are concentrating resources in traditional battlegrounds, with slightly more than half the total spent on advertising going to Michigan, Ohio, Wisconsin, Indiana, Minnesota and Pennsylvania.

IBD:

- Sales of SIM Cards Might Shuffle Deck in Wireless Services.

FINalternatives:

- Nearly one in four hedge funds surveyed said that they have a net short equities position, compared with 6% who held net short equities positions in August. At the same time hedge funds are reducing, or being forced to reduce, their leverage. The weighted average ratio of gross assets to debt fell from 1.2 times in August to 1 times in September. More than half of respondents to the question have a leverage ratio of less than 1 times. Investors have also moved to their largest underweight position in emerging market equities since 2001, thanks to falling commodity prices, global growth concerns and residual inflation fears in emerging market economies.

Finet:
- The IMF cut its forecast for global economic growth in 2008 and 2009, citing an anonymous source from the Group of 10 nations. The IMF reduced its estimate for world growth this year to 4%, from the 4.1% prediction it published in July. The forecast for 2009 expansion has been scaled back to 3.7% from 3.9%. The IMF raised its estimate for US economic growth this year to 1.7% from 1.3% and kept its 2009 expansion forecast unchanged at .8%. For the euro area, the IMF lowered its growth estimate for this year to 1.4% from 1.7%. It reduced its 2009 expansion prediction to .7% from 1.2%.

CFO.com:

- Corporate Armor to Fight Hedge Fund Bullies.

Reuters:
- Morgan Stanley, one of the two biggest commodity derivatives traders, told energy brokers on Thursday in Singapore not to broadcast its bids and offers via Platts' trading window, brokers said. By keeping its bids and offers out of Platts' 30-minute trading window, Morgan Stanley will have less ability to influence the benchmark prices set by Platts, whose daily assessments are widely used in oil trading contracts.

Financial Times:
- Short-selling of financial stocks is to be banned in the United Kingdom from midnight on Thursday night under rules drawn up by the Financial Services Authority.

Telegraph:
- Short-selling: the key players.

Dagens Industri:
- The Swedish government may lower taxes and remove bureaucracy as the global credit market turmoil hits Sweden, citing Industry Minister Maud Olofsson.

Al-Mal:
- Cement prices in Eqypt have fallen 7% after supply outstripped demand, citing Ahmed al-Zini of the Construction Trade Chamber.

Bear Radar

Style Underperformer:
Large-cap Growth (-.44%)

Sector Underperformers:
HMOs (-2.85%), Airlines (-2.69%) and Steel (-2.22%)

Stocks Falling on Unusual Volume:
SRDX, SEIC, GS, PCZ, PRGS, MATK, CELG, SPSS, STT, USMO, BK, PTNR, NTRS, EPE, FII, MS, ETP, EVY, SYNT, SYUT, APOG and RECN

Stocks With Unusual Put Option Activity:
1) STT 2) RSH 3) DFS 4) BK 5) GGP

Bull Radar

Style Outperformer:
Large-cap Value (+2.17%)

Sector Outperformers:
Gaming (+2.88%), Energy (+2.10%) and Disk Drives (+1.70%)

Stocks Rising on Unusual Volume:
ROS, WB, CHU, UBS, CS, BEXP, AXA, PBR, PTR, SNDK, FED, NFP, AINV, BCSI, CVG, CTCT, HCSG, FADV, MIDD, CMTL, SSRI, CONN, LPHI, LIHR, PRAA, DSCP, CFSG, UCBI, VPRT, GOLD, CEDC, CMED, JOSB, RGLD, FGXI, DPL, SSD and RNE

Stocks With Unusual Call Option Activity:
1) KG 2) ATHR 3) CEPH 4) TLM 5) RYL