Stocks Sharply Lower into Final Hour on Global Growth Worries, Financial Sector Pessimism and More Shorting

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Internet longs, Computer longs and Medical longs. I added to my (IWM)/(QQQQ) hedges this morning and then covered them this afternoon, 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 elevated. Today’s overall market action is very bearish. The VIX is falling 1.02% and is historically elevated at 51.61. The ISE Sentiment Index is low at 87.0 and the total put/call is above-average at 1.06. Finally, the NYSE Arms has been running high most of the day, hitting 2.35 at its intraday peak, and is currently 1.81. The Euro Financial Sector Credit Default Swap Index is falling 9.3% today to 116.67 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 falling 3.8% to 171.24 basis points. The TED spread is falling 7.97% to 3.52 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down another 14 basis points to 1.17%, which is down 146 basis points in about three months and at the lowest level since April 1999. I said yesterday that there are particularly troublesome signs in Europe and the ECB is way behind the curve. I think much of today’s US stock sell-off is related to the ECB’s inaction. I still believe a significant coordinated global central bank response is likely over the coming days. On the positive side, gauges of credit market angst are much improved today, which is necessary for a sustainable stock market bottom. Nikkei futures indicate a -340 open in Japan and DAX futures indicate a -56 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on more shorting, financial sector pessimism and global growth worries.

Today's Headlines

Bloomberg:
- Federal Reserve Chairman Ben S. Bernanke signaled policy makers are ready to lower interest rates as the credit freeze worsens the outlook for U.S. economic growth and as inflation concerns wane. ``In light of these developments, the Federal Reserve will need to consider whether the current stance of policy remains appropriate,'' Bernanke said in a speech in Washington.

- Morgan Stanley(MS) said its agreement to raise $9 billion from Japan's Mitsubishi UFJ Financial Group Inc. is ``on track'' after speculation the deal may fall through caused the company's stock to fall as much as 40 percent.

Wall Street Journal:

- Lee Ku-Taek, CEO of Posco, South Korea’s biggest steelmaker, said the risk of deep recession meant companies like Posco should prepare themselves for capacity to outstrip demand. The biggest challenges facing the world’s steel industry were rising raw-material prices, excess capacity and environmental issues, he told the World Steel Association.

NY Times:
- As the Web becomes a more social place, media companies are trying to make it easier to share links with friends, add comments to articles and extend users’ online identities.

- The Citadel Group of Chicago, the giant hedge fund that Mr. Griffin has run so successfully for nearly 20 years, is leaking money. As of Sept. 30, its two main investment funds were down 20 percent this year, The Times said, citing Citadel investors. Most of the losses came in the last few weeks, when the markets swooned. But with the entire hedge fund industry on edge, even Mr. Griffin is considering what once would have been unthinkable: reducing some of the lavish fees that investors pay Citadel to tend their fortunes. Citadel is developing several new, low-price funds that will eschew the industry’s “2 and 20” structure, whereby funds collect annual management fees of 2 percent and, on top of that, take a 20 percent cut of any profits. Some of the funds will bet only on investments and will not use short sales to hedge, effectively taking the “hedge” out of hedge fund. The funds will provide investors with a menu of à la carte investing options, another departure for Mr. Griffin, as he expands beyond hedge funds into broader asset management.

Trading Markets:

- Sentiment Now Bearish As All Heck.

Forbes.com:
- There currently is no centralized trading platform for credit defaults swaps. Exchange operator CME Group(CME) and Citadel Investment Group are hoping to change that.

San Francisco Chronicle:

- California company has new approach to solar. The next wave of solar power technology may be a skinny glass tube that looks like a fluorescent light bulb painted black.

am New York:

- Federal prosecutors moved Monday to delay indefinitely the sentencing of convicted fundraiser Antoin "Tony" Rezko, sending their strongest hint yet that he is ready to spill his political secrets. The filing asks for a postponement while prosecutors and defense attorneys "engage in discussions that could affect their sentencing postures." Speculation has simmered for weeks that the key fundraiser for Gov. Rod Blagojevich and Sen. Barack Obama was whispering what he knows about corruption in Illinois government to federal prosecutors in hopes of getting a lighter sentence.

Reuters:
- European Central Bank Executive Board member Lorenzo Bini Smaghi said inflation pressures have become “less important” and the bank will make monetary-policy decisions when needed, citing Italian radio.

- BNP Paribas SA will merge Fortis’s commodities trading business with its own after agreeing to buy the Belgian bank’s assets for $20 billion.

Jornal de Negocios:
- “European solutions” rather than “national solutions” are needed to fight the financial crisis, European Commission President Jose Barroso said.

Bear Radar

Style Underperformer:
Large-cap Value (-3.33%)

Sector Underperformers:
Airlines (-13.78%), Alternative Energy (-7.21%) and Homebuilders (-7.13%)

Stocks Falling on Unusual Volume:
MS, BCS, SAP, FSLR, DRYS, SYKE, CETV, LNY, AAP, ALG, ASF, TBH, CGV, CBL and BTE

Stocks With Unusual Put Option Activity:
1) SWY 2) TPX 3) AMT 4) MYL 5) CBS

Bull Radar

Style Outperformer:
Large-cap Growth (+.59%)

Sector Outperformers:
Drugs (+1.30%), Wireless (+1.14%) and Medical Equipment (+1.13%)

Stocks Rising on Unusual Volume:
VIP, BHP, ACL, RTP, LLY, BP, REP, STT, VRSN, TESO, TRMB, SPTN, CMED, FFIV, PAAS, CME, OSIP, ULTI, NCIT, LHCG, BIDU, AUXL, WPPGY, SSRI, BEAV, HTLD, CRDN, CENX, PWB, CMN, DT and OKS

Stocks With Unusual Call Option Activity:
1) MTW 2) BAX 3) HA 4) BSX 5) APWR

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- Central banks worldwide must work together in cutting interest rates to help their economies recover from a global recession, fund manager Barton Biggs said. ``Short-term rates are too high around the world, but particularly in the U.S. and Europe,'' Biggs said in an interview on Bloomberg Television. ``A synchronized rate cut would make sense'' and be a ``big help.'' Biggs said he is buying ``high quality'' U.S. stocks that he didn't name. ``You buy into this thing on a gradual, steady basis,'' he said. ``You certainly don't sell on panic here.''

- Australian stocks rallied after the nation's central bank cut its benchmark interest rate by one percentage point, the biggest reduction since 1992.

- The Federal Reserve may have cut borrowing costs today without actually saying so. The central bank used authority granted under last week's financial-rescue legislation to effectively set a floor under its main interest rate that's lower than the 2 percent target set by policy makers last month. The Fed may now pay interest on bank reserves while it floods financial markets with liquidity, pushing down the overnight lending rate by about 0.75 percentage point to 1.25 percent. ``Absolutely, it's a stealth easing,'' said John Ryding, founder and chief economist of RDQ Economics LLC in New York and a former Fed researcher.

- Copper, zinc and aluminum plunged by the exchange-imposed daily limit for a second day in Shanghai. Copper on the London Metal Exchange tumbled as much as 9.1 percent yesterday, and futures in New York slumped as much as 13 percent on concern the deepening credit crisis will stifle global growth and reduce metals demand.

- The cost of protecting investors from Australian corporate bond defaults increased to a record on concern the U.S. government's bank rescue package won't do enough to unlock global money markets as the credit crisis spreads. ``Credit markets remain extremely weak and fragile around the globe, with the developments in Europe the major contributor for the recent weakness,'' Gus Medeiros, a credit analyst at Deutsche Bank AG in Sydney, wrote in a research note today. The Markit iTraxx Australia index rose 34 basis points to 245 at 8:39 a.m. in Sydney, according to prices from Citigroup Inc. The price of the contracts, tied to the debt of 25 companies including Qantas Airways Ltd. and BHP Billiton Ltd., is the highest since the iTraxx benchmarks started in 2004.

- Advanced Micro Devices Inc.(AMD), the money-losing chipmaker struggling to compete with Intel Corp.(INTC), will spin off its manufacturing plants as part of an $8.4 billion investment from the Abu Dhabi government.

- Bank of America Corp.(BAC), the bank that bought Countrywide Financial Corp., halved its dividend and plans to sell $10 billion in common shares after third-quarter profit fell 68 percent. The stock declined 10.3% in late trading.

- UBS AG lowered its price forecasts for copper, aluminum and most bulk commodities amid concern a slowing global economy will dent demand from builders and automakers. Copper will average $2.50 a pound in 2009, down 38% from a previous estimate. Aluminum was cut 28% to $1.15 a pound next year. The bank cut nickel estimates 32% to $7.50 a pound next year. Zinc may average 20% below the previous forecast at 80 cents a pound next year. Iron ore prices may fall 15% in 2009. Coking coal will average $250 a metric ton next year, down 17%, UBS said.

Wall Street Journal:
- Europe Needs A United Approach To the Credit Crunch. Not long ago most European analysts and policy makers viewed the credit crisis as a primarily American problem, with unpleasant but limited spillover to European and other financial markets. European banks like UBS, Northern Rock, Société Générale, IKB, WestLB and several other publicly owned German banks that were hit by the crisis or even collapsed in the course of it were regarded as exceptions that had foolishly exposed themselves to the U.S. subprime market. That view sure has changed.

- After years of putting a strain on world energy supplies, Asia is expected to significantly increase its own oil production next year, a development that could add to downward pressure on prices. The International Energy Agency in Paris expects China, Vietnam, Malaysia and other Asian-Pacific nations to increase production by almost 300,000 barrels of oil a day in 2009, the region's biggest annual increase since at least the 1990s. When contributions from Central Asian nations such as Kazakhstan are added, the total increased production rises to about 500,000 barrels per day, analysts say. Overall, non-OPEC world production is only expected to grow about 760,000 barrels a day in 2009, the IEA says.

MarketWatch.com:
- No capitulation among gold timers at mid-September low.

NY Times:
- European governments pledged Monday to safeguard bank deposits in a bid to stem financial panic, but they stopped short of a coordinated strategy to break the grip of a credit crisis that now threatens to set off a protracted recession across the Continent, sending markets tumbling on both sides of the Atlantic. The lack of orchestration — despite pledges to the contrary from European Union officials Monday and a plea from the head of the International Monetary Fund to step forward with concrete plans — raised the prospect that the European Central Bank would need to help mop up the mess by cutting interest rates, a move hinted at by the E.C.B.’s president, Jean-Claude Trichet, last week.

- As pressure built in the credit markets and stocks spiraled lower around the world on Monday, the Federal Reserve was considering a radical new plan to jump-start the engine of the financial system.

- Emerging markets took one of their biggest collective tumbles in a decade Monday as stock markets from Mexico to Indonesia to Russia were gripped by fears of a collapse of Europe’s banking system and concern that a global recession could drag down the price of commodities, forcing a steep slowdown in emerging-market growth.

CNNMoney.com:
- September was the worst month on record for hedge fund performance, but for one legendary player what's going on in the markets now must seem like its coming straight from the gates of hell. Tontine Associates, a $10 billion Greenwich, Conn.-based fund, told investors on Friday that it expected to show a 2008 loss through Sept. 30 of 65%, according to two people familiar with the fund's performance. Lately, Gendell has wagered on a worldwide economic boom, investing heavily in global energy services and infrastructure companies.

Reuters:

- One top U.S. Federal Reserve official on Monday warned against another interest rate cut to offset the credit crisis, but a second policy-maker who has defied cuts all year said inflation was receding as a concern. "I'm not as worried as I was before that we might, when the financial system was repaired, have ... inflationary pressure," Dallas Federal Reserve President Richard Fisher told a community bankers in Wichita Falls, Texas.

- The U.S. Interior Department will designate within two years protected areas of the Arctic that are considered critical habitat for polar bears and cannot be harmed by oil development as part of a legal settlement with environmental groups on Monday.

Financial Times:
- Several of China's largest steelmakers are expected to cut output by about 20 per cent this month in a bid to support falling steel prices at a time of weakening demand. Steel mills in northern China, including Shougang Steel, Shandong Iron and Steel, Hebei Iron and Steel, and Angang Steel met last week to discuss cuts that could total 20m tonnes, according to the state-run Xinhua news agency. Shares of Angang Steel fell by their 10 per cent daily limit in Shanghai trading in response to the reports of output cuts. "The sharp slowdown in the property market is having a severe impact on Chinese steel producers," she said, noting that the property sector accounted for 38 per cent of steel industry demand. She quoted Xu Lejiang, the Baosteel chairman, as telling a recent industry conference that the era of rapid steel industry growth "will soon be remembered as history". Chinese steel consumption rose 16 per cent in the first half of 2008. Since then, the three main industries that consume steel in China - construction, household appliances and the car industry - have all shown signs of a slowdown, say industry sources.

- Russia's benchmark RTS index suffered its sharpest fall in its 13-year history yesterday as investor jitters intensified over global financial turmoil, falling oil and commodity prices and overleveraged oligarchs at home. The dollar-denominated RTS closed 19.1 per cent down, while the rouble denominated Micex fell 18.7 per cent, in spite of brief trading suspensions on both exchanges in an attempt to minimise the steep falls. The central bank spent an estimated $5bn to prevent the rouble weakening beyond the 30.41 mark against the euro-dollar basket. Weighing heavily on investor sentiment were fears that Russia's richest oligarchs could be dumping shares on the market if they faced margin calls on tens of billions of dollars in loans.

TimesOnline:
- The UK government is considering injecting $69 billion to $87.2 billion of capital into retail banks by buying shares to revive investors confidence. The government may end up with stakes in Barclays Plc, Royal Bank of Scotland Group Plc, Lloyds TSB Group Plc and HBOS Plc in return for so-called preference shares that gives holders more rights than common stockholders.

Daily Telegraph:

- Confederation of British Industry urged the Bank of England to deliver a sharp interest rate cut this week amid warnings from economists that a recession might be deeper and longer than initially thought, citing CBI. CBI want the BOE’s Monetary Policy Committee to bring in a 50-basis-point cut in order to stabilize confidence for markets, businesses and consumers. The committee will make its rate decision Oct. 9.

Korea Economic Daily:

- Hyundai Motor Co. plans to sell plug-in electric cars from 2012, earlier than its initial schedule of 2014 to meet growing demand.

China Daily:

- Property transactions in China's major cities hit a record low over the past National Day holiday as more potential homebuyers adopted a wait-and-see attitude. Statistics from the Beijing Real Estate Transaction website revealed that the average number of daily deals over the holiday week fell 72 percent year-on-year in the capital to 69 units, making it the worst period so far this year for the property sector. Shanghai Autumn Real Estate Expo, regarded as a barometer of the industry, attracted 130,000 visitors from Oct 1 to 4. Although this was the same number as 2006, its transaction volume fell 37 percent over the same period. The situation is equally gloomy in Shenzhen, where a five-day real estate expo was held over the National Day holiday. While 20,000 sq m of property was changing hands every day at the fair in 2006, the daily amount ranged from 4,000 to 9,000 sq m this year. Luo Yuan, general manager of Beijing-based Sunrun Real Estate Agencies, said one of the reasons for the sluggish market was that property prices still remain beyond the reach of many potential buyers.

Folha de S. Paulo:

- Brazil’s government plans to authorize the central bank to buy loan portfolios from commercial banks, in an attempt to help small- and mid-sized banks amid a shortage of credit.

Late Buy/Sell Recommendations
- None of note

Night Trading
Asian Indices are -2.25% to +.50% on average.
S&P 500 futures +1.34%.
NASDAQ 100 futures +1.30%.

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Earnings of Note
Company/EPS Estimate
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Economic Releases
2:00 pm EST

- Minutes of Sept. 16 FOMC Meeting

3:00 pm EST

- Consumer Credit for August is estimated to rise to $5.0 billion versus $4.6 billion in July.

Upcoming Splits
- (EBIX) 3-for-1

Other Potential Market Movers
- The weekly retail sales reports, JMP Securities Healthcare Conference, Johnson & Rice Energy Infrastructure Conference, Maxim Group Growth Conference and William Blair Small-cap Growth Conference could also impact trading today.

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