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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Crude oil fell after U.S. equities slumped on speculation banks and real-estate companies are running short of money because of a worsening credit crisis that may curb economic growth and energy demand. Oil futures have declined 39 percent from the record $147.27/bbl. reached July 11. Arjun Murti, the Goldman Sachs Group Inc. analyst who predicted a crude ``super spike'' in March 2005, said there is a ``downside'' risk to his forecast that oil may rise to $120 in the fourth-quarter. ``Oil prices increasingly appear unlikely to sustain a rally until global GDP expectations bottom,'' Goldman said in a note. ``While we believe oil supply/demand fundamentals are not as bearish as is sentiment, we recognize that concern continues to mount towards global oil demand growth.''

- Corn fell to a 10-month low on speculation demand will slow as global livestock producers use more wheat as a cheaper alternative in feed rations. Wheat prices are down 55 percent from a record in February, and the U.S. Department of Agriculture forecasts a record global harvest in the year that ends in June. Export sales of corn from the U.S., the world's largest producer and shipper, are down 37 percent in the current marketing year, USDA data show. ``Export demand is miserable'' for corn, said Charlie Sernatinger, a market analyst for Fortis Clearing Americas LLC in Chicago.

- Texas billionaire T. Boone Pickens, whose hedge fund has lost about $1 billion this year, sued a unit of defunct investment bank Lehman Brothers Holdings Inc. for $59.9 million over claims it broke a default agreement.

- The Bank of England should cut the benchmark interest rate by a half point tomorrow after the economy tumbled into a recession in the third quarter, the National Institute for Economic and Social Research said.

- Alcoa Inc.(AA), the largest U.S. aluminum producer, said third-quarter profit fell 52 percent, trailing analyst estimates, as prices dropped and slowing economic growth hurt demand in North America.

Wall Street Journal:
- Barack Obama and John McCain clashed repeatedly over the causes and cures for the worst economic crisis in 80 years Tuesday night, with the Republican presidential nominee calling for a sweeping new program to keep homeowners from foreclosure. Sen. McCain pledged in the latest campaign debate to require the federal government to renegotiate the mortgages of individual homeowners and make them more affordable, a sweeping proposal that goes considerably beyond the $700 billion bailout that recently cleared Congress."Is it expensive? Yes," Sen. McCain said at the second presidential debate in Nashville, Tenn. "But we all know, my friends, until we stabilize home values in America, we're never going to start turning around and creating jobs and fixing our economy."

- Europe is poised to relax restrictions preventing drug companies from reaching out to consumers.

- Burger King Holdings Inc.(BKC) will open its first Whopper Bar in Orlando, Fla., in February as it lays plans to put the bars across the globe.

- World steelmakers, gathering at a meeting in Washington, are scrambling to determine how far to cut output before prices fall below the break-even cost of making steel.

- Was Lehman Brothers Holdings CEO Dick Fuld driven to distraction by short-sellers as the company’s stock price plunged this year? Fuld didn’t let up on his hatred for short-sellers–primarily David Einhorn–even after his company filed for bankruptcy last month, and he believed the shorts were part of a cabal driven by Goldman Sachs Group(GS). In July, a former Lehman executive named Jarret Wait stopped by Lehman’s offices and said, according to an email by Lehman executive Thomas Humphrey, “that in just a few weeks on the ‘buy’ side,…it is very clear that GS is driving the bus with the hedge fund kabal& greatly influencing downside momentum,Leh & others!”

- Seeking to gain the upper hand in the fight for Wachovia Corp., Citigroup Inc. is reaching out to potential partners to join its bid for the Charlotte, N.C., bank, according to people familiar with the matter.

- Dozens of real-estate funds and other investors hoping to buy into the $700 billion bailout may need to take on the government as a partner.

- Looking to capitalize on the credit-market shutdown, Goldman Sachs Group Inc. has closed a $10.5 billion fund that will make senior secured loans to companies.

Reuters:

- Wells Fargo & Co(WFC) is likely to get about 75 to 80 percent of Wachovia Corp's(WB) deposits, while Citigroup Inc(C) would get the remainder, a person briefed on the matter said on Tuesday. The situation is in flux and the outcome is still unclear, the person cautioned, adding Wells Fargo may end up with 100 percent of Wachovia's deposits, and Citigroup with none.

- YouTube, the world's most popular video-sharing site, will start to sell music and video games and experiment with new advertising formats to grow revenue, executives said on Tuesday. The Google-owned (GOOG) business is taking the first steps toward building an e-commerce service through which it will sell music, films, TV shows, video games, books, concert tickets and other media-related products featured on the millions of videos on YouTube.

Australian Financial Review:

- Australia’s corporate regulator and its US counterpart agreed to cooperate in investigations into undisclosed short selling in the Australian share market. Under the agreement signed last month the Australian Securities and Investments Commission may ask the SEC to track trades in Australian-listed stocks by US-based hedge funds that may not have disclosed they are short selling.

China Daily:

- China’s small banks are being encouraged to raise their capital adequacy ratios to 10% by year-end amid the global financial meltdown. The China Banking Regulatory Commission urged medium-sized listed banks to raise the ratio to 12% by the end of next year. The current ratio requirement is more than 8%, it said.

Late Buy/Sell Recommendations

Oppenheimer:

- Rated (MYGN) Outperform, target $92.

Edward Jones:
- Raised (DELL) to Buy.

Night Trading
Asian Indices are -4.50% to -2.25% on average.
S&P 500 futures +.22%.
NASDAQ 100 futures +.45%.

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Earnings of Note
Company/EPS Estimate
- (COST)/.92

- (MON)/-.10

- (RT)/.11

- (SGR)/.71

Economic Releases
10:00 am EST

- Pending Home Sales for August are estimated to fall 1.3% versus a 3.2% decline in July.

10:35 am EST

- Bloomberg consensus calls for a weekly crude oil inventory build of +2,200,000 barrels versus a +4,278,000 barrel increase the prior week. Gasoline supplies are expected to rise by +1,500,000 barrels versus a +901,000 barrel increase the prior week. Distillate supplies are estimated to fall by -900,000 barrels versus a -2,359,000 barrel decline the prior week. Finally, Refinery Utilization is expected to rise +6.0% versus a +5.56% gain the prior week.

Upcoming Splits
- None of note

Other Potential Market Movers
- The weekly MBA mortgage applications report could also impact trading today.

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

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

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In Play

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