Stocks Finish Sharply Lower, Weighed Down by Commodity, Construction, Gaming, Homebuilding and Airline Shares

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Stocks Sharply Lower into Final Hour on Global Growth Worries

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Gaming longs and Medical longs. I took profits in some of my emerging market/commodity shorts, covered some of my (IWM)/(QQQQ) hedges and was stopped out of some of my longs, thus leaving the Portfolio 75% net long. The tone of the market is very negative as the advance/decline line is substantially lower, every sector is falling and volume is heavy. Investor anxiety is very elevated. Today’s overall market action is very bearish. The VIX is rising 20.2% and is historically elevated at 54.69. The ISE Sentiment Index is low at 99.0 and the total put/call is very high at 1.53. Finally, the NYSE Arms has been running very high most of the day, hitting 6.02 at its intraday peak, and is currently 1.69. The Euro Financial Sector Credit Default Swap Index is rising 5.03% today to 129.0 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 rising 3.8% to 186.0 basis points. The TED spread is falling 1.8% to 3.81 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down another 14 basis points to 1.31%, which is down 132 basis points in about three months and at the lowest level since December 2001, when deflation was the concern. I said late last week that the US rescue plan was a large positive longer-term, but that a significant global response was necessary to reverse the ongoing credit markets freeze. There are particularly troublesome signs in Europe and the ECB is way behind the curve. France called for an emergency G8 meeting this afternoon, so hopefully more effort from the region is forthcoming. Nikkei futures indicate a -300 open in Japan and DAX futures indicate an +43 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, bargain-hunting and diminishing inflation expectations.

Today's Headlines

Bloomberg:
- The Federal Reserve will double its auctions of cash to banks to as much as $900 billion and is considering further steps to unfreeze short-term lending markets as the credit crunch deepens. ``The Federal Reserve stands ready to take additional measures as necessary to foster liquid money-market conditions,'' the central bank said in a statement released in Washington today. Fed and Treasury officials are ``consulting with market participants on ways to provide additional support for term unsecured funding markets,'' the statement said.

- Richard Fuld, the chief executive officer of Lehman Brothers Holdings Inc., said the investment bank was felled by rumors, out-of-date rules and slow reactions by regulators that fueled a ``storm of fear'' on Wall Street. ``Ultimately what happened to Lehman Brothers was caused by a lack of confidence,'' Fuld said today in written testimony to congressional investigators. ``This was not a lack of confidence in just Lehman Brothers, but part of what has been called a storm of fear enveloping the entire investment-banking field and our financial institutions generally,'' Fuld, 62, blamed ``a litany of destabilizing factors'' for Lehman's failure, including widening costs to borrow, accounting rules that forced it to write down the value of its assets to fire-sale prices, short selling without having to borrow the shares of a company, and imminent credit downgrades by rating companies.

- The euro had its biggest one-day drop against the yen since its 1999 debut as the deepening credit crisis prompted European governments to pledge bailouts for troubled banks while stopping short of coordinated action. The 15-nation currency fell below $1.35 for the first time since August 2007 after European authorities avoided announcing any plan comparable to the $700 billion U.S. bailout.

- Eli Lilly & Co.(LLY) agreed to buy ImClone Systems Inc.(IMCL), the biotechnology company controlled by billionaire Carl Icahn, for $6.5 billion, and Bristol-Myers Squibb Co. said it would drop its hostile bid.

- Commodities markets are heading for the biggest annual decline since 2001 as investors exit leveraged bets and slowing economic growth erodes demand for raw materials. The value of the 19 commodities in the Reuters-Jefferies CRB Index fell $280.6 billion, or 43 percent, from its July 3 peak, a loss larger than their total worth two years ago, data compiled by Bloomberg show. About 15 percent of investors in Boone Pickens's BP Capital LLC hedge fund may want their money back. The same credit-market seizure that led to last month's bankruptcy of New York-based Lehman Brothers Holdings Inc. and the forced sale of Merrill Lynch & Co. is squeezing speculators who drove commodities to record highs. Slower expansion in the U.S., China and India is also undermining prices of crude oil, which fell 39 percent, and corn, down 46 percent. ``The day of steadily rising commodity prices is over,'' said Chris Rupkey, the New York-based chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. ``A lot of the demand for commodities has been speculation, and now that demand is falling away because of fear taking hold in the market.'' Outstanding contracts for 17 commodity futures traded in New York and Chicago fell 26 percent since a peak on Feb. 29 to the fewest in two years, data compiled by Bloomberg show. About 450 commodity hedge funds held $80 billion of assets as of Sept. 1, up from $55 billion last year, said Brad Cole, president of Cole Partners Asset Management in Chicago. Investments in commodity indexes reached a record $175 billion at the end of June, Barclays Capital said. Institutional investors withdrew $5 billion from commodity indexes during the third quarter, according to Barclays Capital. The combination of outflows and dropping prices pushed assets under management in indexes down 31 percent to about $120 billion, the bank said. Funds of hedge funds in Europe may receive redemptions of up to 25 percent of assets by the end of the fourth quarter, said Aoifinn Devitt, founder of Clontarf Capital, a London-based investment consulting firm that tracks performance of about 20 commodity hedge funds.

- Emerging-market bonds and currencies tumbled on concern that the seizure in credit markets will trigger a global recession, squelching demand for the developing nations' commodity exports. The extra yield investors demand to own developing-nation bonds instead of U.S. Treasuries swelled 43 basis points, or 0.43 percentage point, to a four-year high of 4.80 percentage points at 11:32 a.m. in New York, according to JPMorgan Chase & Co. Brazil's real plummeted 5.34 percent to 2.1601 per dollar. ``In emerging markets, the credit crisis and drop in commodities create substantial challenges for monetary policy and fiscal accounts,'' said Igor Arsenin, an emerging-market fixed-income strategist at Credit Suisse Group in New York. ``Any country that needs capital in the form of foreign direct investment or portfolio flows is going to be vulnerable.''

- Emerging market stocks fell the most in at least two decades and exchanges in Brazil and Russia were forced to halt trading as the global banking crisis escalated in Europe and oil fell below $90 a barrel. Brazil's Bovespa index tumbled 15 percent, while Russia's Micex Index plunged nearly 20 percent before trading was halted for a third time today. China's benchmark CSI 300 Index slid 5.1 percent, its biggest one-day decline since August. Indonesia and Saudi Arabia lost the most in at least six years. The MSCI Emerging Markets Index slumped 11 percent, the biggest intraday loss since 1987 when Bloomberg records began.

- Citigroup Inc.(C) sued Wells Fargo & Co.(WFC) and its takeover target Wachovia Corp.(WB) for $60 billion, claiming their agreement violates its rights to buy a portion of the Charlotte, North Carolina-based lender under a previous deal.

- The Federal Reserve Bank of New York will meet tomorrow with banks and investors in credit-default swaps to gauge progress on an initiative to create a clearinghouse to curb risks in the market, a spokesman said.

- Hartford Financial Services Group Inc.(HIG), the Connecticut insurer facing credit downgrades, rose the most in eight years after saying Allianz SE will buy $2.5 billion of the company's stock and debt. The insurer surged $3.57, or 13 percent, to $30.97 at 10:58 a.m. in New York Stock Exchange composite trading, after gaining as much as 20 percent, the most since March of 2000.

- The benchmark index for U.S. stock options jumped to the highest in its 18-year history on concern the global economic slowdown will continue on further credit- market losses. The VIX, as the Chicago Board Options Exchange Volatility Index is known, rose 18 percent to 53.43 at 1:22 p.m. in New York and earlier touched 56.32.

Wall Street Journal:

- There is an upside to the weakening U.S. and global economies, at least if you're an American steel consumer. The commodity is more available, and prices have fallen 20% in the past three weeks. Behind the shift is a surge of foreign steel into the U.S., with the latest figures from August showing that steel imports from Russia jumped 86%, from India 37% and from China 33%. Analysts believe that the influx continued through September. The upshot is that steel buyers who have seen prices rise nonstop for nearly two years are finally getting some relief.

- J. Christopher Flowers has carved out a reputation as a deft turnaround artist of struggling financial institutions. He now must apply those skills to his own firm, private-equity shop J.C. Flowers & Co. On Friday, Mr. Flowers delivered grim news to his investors: His fund has marked down the value of $6.5 billion worth of investments by 30% -- an unrealized loss of nearly $2 billion, according to people familiar with the fund.

Atlanta Journal Constitution:
- The turmoil that is rewriting the rules of the banking industry may also be making it more likely that SunTrust(STI), the only major bank still headquartered in Atlanta, will become a takeover target — someday. But SunTrust’s standing as an independent bank may actually be more secure over the short term as would-be acquirers go after weaker game, several industry experts said.

AppleInsider:

- In a little over a year, Apple’s(AAPL) iPhone has grown to become the second best-selling mobile handset in the US, according to NPD. More specifically, NPD said the iPhone 3G was the No. 1 US smartphone based on units sales from June through August, outselling the Blackberry Curve, Blackberry Pearl, and Palm Centro. Of those customers who purchased an iPhone during those months, 30 percent switched from other mobile carriers to join AT&T, according to the firm. That compares to 23 percent of consumers who switched carriers during the same time period for other reasons. Nearly half of iPhone switchers (47 percent) made the jump to AT&T from rival Verizon Wireless, while 24 percent switched from T-Mobile. Another 19 percent are reported to have switched from Sprint. Also on Monday, two independent Apple analysts issued a report suggesting that Apple has more than surpassed its self-imposed goal of selling more than 10 million iPhones during the 2008 calendar year.

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Hedge Funds Review:

- Hedge funds will face increasing pressure from investors to ensure they have robust operational controls and risk management. This is one of the findings of the latest PwC global hedge funds white paper*. “It would not be surprising if investors, particularly institutional investors, do not start to request increasing levels of comfort on what they might consider are the key operational risks pertinent to these sort of structures (eg governance, investment management process, valuation, operational tax risks),” said Phillips. It is likely that the ability of prime brokers to lend to hedge funds will become even more difficult. Phillips said it was unlikely hedge funds will have access to prime broker capital as they did for lending and may need to start tapping other capital pools. This is likely to impact the funds’ overall investment ability. There will be increased costs to hedge fund managers of borrowing and credit will not be as cheap as it has been for them. Investors will demand a higher standard of operational risk and in particular will want funds to provide controls are in place regarding stress testing of prime broker relationships. Phillips said the industry overall will come under more pressure to adopt best practice standards like those outlined by the Hedge Funds Standards Board and the US President’s working group. While Phillips does not expect regulators to push for more legal controls of funds, recent legislation from the European parliament requires the EU commission to look at how to regulate funds in Europe. However, he does expect hedge funds to come under closer scrutiny and review by tax authorities eager to make up lost revenues due to the financial crisis.

Bear Radar

Style Underperformer:
Mid-cap Growth (-7.56%)

Sector Underperformers:
Steel (-16.07%), Construction (-12.41%) and Oil Service (-11.95%)

Stocks Falling on Unusual Volume:
VIP, THE, MBT, SU, PBR, OSIP, XTXI, POOL, PENN, NFLX, ISRG, CETV, DRYS, FGP, PVD, APU, KMP, SBR, HTE, DOM, NRT, PGH and BTE

Stocks With Unusual Put Option Activity:
1) DNDN 2) LMT 3) GD 4) GCI 5) PDE

Bull Radar

Style Outperformer:
Small-cap Value (-5.12%)

Sector Outperformers:
REITs (-3.25%), Telecom (-3.8%) and Semis (-3.89%)

Stocks Rising on Unusual Volume:
IMCL and SUSS

Stocks With Unusual Call Option Activity:
1) DNDN 2) CA 3) RYL 4) MRVL 5) HA

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