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Monday Watch

Weekend Headlines
Bloomberg:

- Asian stocks and U.S. index futures advanced as European leaders agreed to shore up banks and Asian governments said they will support their financial systems. Financial stocks jumped, accounting for more than half of MSCI Asia Pacific excluding Japan Index's 3 percent gain, after leaders of the 15 countries using the euro pledged to back new bank debt and use taxpayer money to support distressed lenders.

- The Federal Reserve will consider all policy options necessary to stabilize financial markets and limit damage to the economy, said Richard W. Fisher, president of the Dallas Fed bank. ``We can and we will restore order to the credit markets,'' Fisher said during a panel discussion sponsored by the Institute of International Finance in Washington. He said the U.S. faces a period of ``negative growth'' and pledged that the Fed would do ``whatever'' is necessary to ease strains on markets and the economy.

- Federal regulators directed Fannie Mae(FNM) and Freddie Mac(FRE) to start purchasing $40 billion a month of underperforming mortgage bonds as the Bush administration expands its options to buy troubled financial assets and resuscitate the U.S. economy, according to three people briefed about the plan. Fannie and Freddie began notifying bond traders last week that each company needs to buy $20 billion a month in mostly subprime, Alt-A and non-performing prime mortgage securities, according to the people, who asked not to be identified because the plans are confidential. The purchases would be separate from the U.S. Treasury's $700 billion Troubled Asset Relief Program.

- Prime Minister Gordon Brown said he discussed a ``comprehensive plan'' of measures with European leaders to help stem the financial crisis and the British premier believes they will press ahead with the proposals. ``Today we discussed a comprehensive plan that would involve not only cash in financial markets, but also recapitalize our financial system'' and fund mortgages, Brown told reporters in Paris after an emergency summit. ``I believe our European colleagues will move ahead with the comprehensive plan. There's common ground now.''

- Citigroup Inc. Senior Vice Chairman William Rhodes said an accounting rule requiring that a fair value be placed on company holdings, blamed for exacerbating the credit crisis, needs to change when markets are inactive. ``Nobody wants to throw that out, but I think in times of illiquid markets, sometimes you need some modifications,'' Rhodes said at an Institute of International Finance conference in Washington today. Deutsche Bank AG Chief Executive Officer Josef Ackermann, the institute's chairman, urged an ``immediate high-level dialogue'' on fair-value accounting issues.

- U.S. exchanges may seek to impose a temporary ban on short sales for individual stocks that plunge, as regulators seek to rein in a practice blamed for forcing down shares of financial companies such as Morgan Stanley. Under the plan, a stock that ends trading with a loss of at least 20 percent would be protected from short sellers for the following three days, the people said.

- Italy may push for the abolition of hedge funds when it takes over the Group of Seven presidency from Japan next year, Finance Minister Giulio Tremonti said. “They are dark and opaque,” Tremonti said. “They are demented” and do not “conform to the laws of capitalism.” Asked if that means Italy would go so far as to propose abolishing them, he said it’s “something we will talk about.”

- The cost of protecting Australian corporate bonds from default declined by the most ever after Prime Minister Kevin Rudd and European leaders pledged yesterday to guarantee bank borrowing. The Markit iTraxx Australia Index of credit-default swaps was quoted 65 basis points lower at 200 at 12:25 p.m. in Sydney, Citigroup Inc. data show. That exceeds the previous March 25 record after Bear Stearns Cos. was rescued, CMA Datavision prices show. “There’s positive sentiment all around the world,” said Mark McCarthy, a credit trader for ABN Amro Holding NV in Sydney.

- The hedge-fund industry may lose as much as one-fifth of its $1.93 trillion in assets by the end of the year as markets decline and investors withdraw their money, according to Commerzbank AG. “The amount of firepower in the form of capital deployed will be a shadow of its former self,” Mehraj Mattoo, global head of alternative investments for Commerzbank, said.

- The record 39% decline in commodities since July 3 is nowhere near finished, if history is any guide. The Reuters/Jefferies CRB Index of 19 commodities from coffee to silver would have to drop another 37% to reach the trough of the 2001 recession and 35% for the 1998 slide, when crude bottomed at $10.35 a barrel. The measure is 28% above its lowest during the economic contraction that ended in November 1982. Copper, after its biggest weekly loss in two decades last week, is still triple 2001 levels. Investors say rising stockpiles of copper and slowing energy demand mean prices will continue to fall.

- Chesapeake Energy Corp.(CHK) said its chief executive officer, Aubrey McClendon, involuntarily sold ``substantially all'' of his common shares of the company's stock over the past three days to meet margin loan calls. McClendon, 49, owned 33.5 million shares, or 5.8 percent of the company's common stock, according to a Sept. 30 filing with the U.S. Securities and Exchange Commission. He was the company's third-largest shareholder. Chesapeake, this year's worst-performing petroleum producer in the Standard & Poor's 500, fell 6.7 percent in New York trading today amid concern hedging contracts won't protect the company against a plunge in natural-gas prices. McClendon's divestiture was announced after the close of regular trading on U.S. stock markets.

- Joe Biden has been an ally of trial lawyers throughout his tenure in the U.S. Senate, opposing every effort to curb lawsuits against businesses and doctors. The lawyers are returning the favor. Five of Biden's 10 biggest lifetime campaign donors are members of law firms that specialize in bringing personal-injury cases, according to the firms' Web sites and the Washington-based Center for Responsive Politics.

- Morgan Stanley(MS) and Goldman Sachs Group Inc.(GS), the biggest independent U.S. investment banks, may reap cash infusions as part of Treasury Secretary Henry Paulson's plan to buy stakes in financial institutions, investors said.

- The U.S. removed North Korea from its list of state sponsors of terrorism, granting the communist state a long-sought prize in exchange for wider scrutiny of its nuclear-weapons program. North Korea agreed inspectors could examine facilities it has revealed as well as other locations suspected of being used for any part of its nuclear program. It also agreed to immediately resume disabling its Yongbyon reactor, a source of weapons-grade plutonium, U.S. envoy Sung Kim told reporters in Washington today.

- Asian central banks are studying ways to coordinate an effort to tackle the financial crisis that threatens to erode growth and confidence in the region, Philippine policy maker Diwa Guinigundo said.

- Russia test-fired long-range ballistic missiles today as President Dmitry Medvedev pledged to build up the country's armed capabilities.

- Mehdi Karrubi, an Iranian cleric who favors resuming relations with the U.S., said he will run in the 2009 presidential elections, becoming the first announced candidate in the race.

- The average price of regular gasoline at U.S. filling stations fell by a record amount to $3.31 a gallon, an industry survey showed. Gasoline dropped 35 cents, or 9.5 percent, in the two weeks ended Oct. 10, according to oil-industry analyst Trilby Lundberg's survey of 7,000 filling stations nationwide. Crude oil, which accounts for about 73 percent of gasoline's pump price, has fallen 46 percent from a record $147.27 a barrel reached on July 11. U.S. gasoline demand fell 9.5 percent last week, the biggest decline in more than three years, as a slowing economy may be curtailing driving, a MasterCard Inc. report showed Oct. 7. It was the 24th consecutive weekly decline, and the biggest since September 2005, after Hurricane Katrina sent pump prices to records.

- The Federal Reserve approved Wells Fargo & Co.'s $12.2 billion takeover of Wachovia Corp., clearing one of the last obstacles for creation of the largest U.S. bank branch network.

- Rio Tinto Group(RTP) and BHP Billiton Ltd.(BHP), the world’s second- and third-largest iron ore suppliers, may have to cut annual contract iron ore prices next year because oversupply may send spot prices lower, Macquarie Group Ltd. said. “Reports from China indicate that spot prices are likely to fall further amid continuing oversupply,” Macquarie analysts said today.

- Goldman Sachs Group Inc.(GS), the biggest independent Wall Street firm, lowered its price forecasts for crude oil after underestimating the depth of the global financial crisis. Goldman reduced its estimate for the US benchmark West Texas Intermediate crude for the fourth quarter to $75 a barrel from $110, and cut its year-end target to $70 a barrel from $115, Goldman’s research analysts led by Jeffrey Currie and Giovanni Serio said today. The analysts also lowered their price forecasts for 2009, with the average for the year reduced to $86 a barrel from $123, the analysts said.

Wall Street Journal:

- Spain's Banco Santander SA was in advanced talks late Sunday to acquire full control of Sovereign Bancorp Inc., a large thrift-holding company hobbled by souring loans, according to people familiar with the matter.

- Morgan Stanley(MS) may raise the dividend on preferred shares it’s offering to Mitsubishi UFJ Financial Group Inc. to encourage the Japanese lender from backing out of an agreement to buy a 21% stake. Morgan may also reduce the amount of common shares and change the conversion price of convertible shares, while retaining the general terms of the original $9 billion agreement.

- The euro zone's biggest economies prepared to unveil plans to spend tens of billions of euros in state funds to prop up their banking systems, as leaders agreed on a menu of measures to cope with the growing financial crisis. The leaders of the 15 countries that use the euro said choices on the menu, to be implemented as governments see fit, included partial nationalization of banks and provision of state-guaranteed loans. The euro-zone leaders also agreed to loosen mark-to-market rules -- which force banks to book their assets at the price they would get if they sold them now.

CNBC.com:
- The continued turmoil in the financial markets could spark a wave of mergers among banks and remaining brokerage firms in the coming weeks, even as the federal government unveils a plan to make direct investments in banks to further bolster the financial health of the financial sector, according to Wall Street executives interviewed by CNBC.

NY Times:

- General Motors(GM) is in preliminary talks about a possible merger with Chrysler, a deal that could drastically remake the landscape of the auto industry by reducing the Big Three of Detroit automakers to the Big Two, The New York Times’s Bill Vlasic and Andrew Ross Sorkin reported late Friday.

- YouTube to Offer TV Shows With Ads Strewn Through. The staggering growth of YouTube — five billion videos were viewed there in July — has come primarily from short videos that last only a few minutes. But Internet users are gradually becoming more comfortable watching longer videos online, prompting YouTube’s commitment to the format.

- eBay(EBAY) Stumbles, Amazon(AMZN) Surges Amid Economic Storm.

- In what could set an important precedent, federal officials assured a big Japanese bank late Sunday that its planned investment in the embattled Wall Street giant Morgan Stanley(MS) would be protected, according to people involved in the talks.

- Those With a Sense of History May Find It’s Time to Invest. Investors have again convinced themselves that this time is different, that the credit crisis will push economies worldwide into the deepest recession since the Depression. Fear runs even deeper today than greed did a decade ago. But in their panic, investors are ignoring 60 years of history.

IBD:
- Axsys Technologies(AXYS): Military Contractor Sets Sights On New Markets, New Products.

Reuters:

- China's largest steel maker, Baosteel Group, will cut steel production over the next three months in the face of a weakening outlook for demand, sources close to the company said on Saturday.

- Iran will ask for an oil output cut at an OPEC emergency meeting scheduled for mid-November in Vienna, Oil Minister Gholamhossein Nozari told an Iranian newspaper. "It seems that if OPEC does not take a major decision to confront falling oil prices, investment conditions in the oil industry would be faced with a serious danger."

Financial Times:

- Commodities traders are rushing their private bilateral contracts into exchanges and clearing houses as they race to reduce their counterparty risk amid a deepening financial crisis. The transfer of the opaque over-the-counter deals comes as observers warn that commodities, where trading has ballooned in the past five years, could be the next market hit by counterparty failures.

- Once the immediate crisis has passed, financial regulators are adamant that banks will not be allowed to imperil the world economy again. If the authorities are successful, financial institutions will be prohibited from ramping up as much debt with so few buffers.

- Harbinger Capital, the activist New York hedge fund that shot to fame last year with a lucrative bet against subprime mortgages, has made and lost about $5bn (€3.7bn, £2.9bn) this year after dropping by a third in the past three months. The main $14bn fund of Harbinger, run by Phil Falcone, fell 17.9 per cent last month, to leave it down 5.4 per cent for the year so far. Investors said it had given back all the gains of its first six months, when it made close to 43 per cent, and that there would be more losses from its exposure to Lehman Brothers, the failed bank. However, Harbinger's problems pale in comparison with those of many other big hedge funds. They have been having their toughest year on record, with many down 20 per cent or more.

- Amid deepening international financial panic, the World Bank has slashed its 2009 growth forecasts for Latin America and expects several countries in the region to ask it for emergency cash at its annual meeting this week. With plunging stock markets and currencies, evaporating credit lines and sinking prices for the commodities that have made many Latin American economies boom, the bank now expects regional growth of 2.5 to 3.5 per cent next year, according to Pamela Cox, vice-president for Latin America and the Caribbean. That compares with the bank's earlier estimate of 4.2 per cent, and its forecast of 4.6 per cent growth for this year.

Guardian:

- The collapse in Morgan Stanley's(MS) shares late last week has led to a wave of bets being taken on the blue-chip investment bank failing to meet its financial obligations. Investors fear that the bank's debt would return only a fraction of its face value in the event of a bankruptcy filing and are pushing up the cost of insuring its bonds against default.

International Herald Tribune:

- Europe's leaders have repeatedly pointed fingers at the United States since the latest wave in the credit crisis crossed the Atlantic this month. But the reality is that many European banks emulated the riskiest characteristics of their American counterparts, bulking up on what turned out to be toxic debt and relying on short-term loans, rather than deposits, to finance their operations. By some measures, in fact, European banks exposed themselves to even higher levels of risky debt than American banks did.

Kronen Zeitung:

- European Central Bank council member Ewald Nowotny said the ECB opened an “unlimited window” of liquidity for the market this week. A common European solution of the problem is needed, Nowotny said.

South China Morning Post:

- US private equity firm Blackstone Group LP(BX) dropped a $161 million Shanghai property purchase amid the global financial crisis and China’s real estate price slump. Blackstone, which agreed to buy the stake from VXL Capital Ltd. four months ago at almost twice the 586 million yuan the Hong Kong-listed company paid for it in March 2006, had planned to use it as a springboard to more China real estate investments.

Saudi Press Agency:

- The global oil markets are well balanced and there is no shortage of supplies, citing an interview with Finance Minister Ibrahim al-Assaf.

- The United Arab Emirates is facing “second-round effects” of faster inflation, Central Bank Governor Sultan Bin Nasser al-Suwaidi said. Inflation in the UAE accelerated to a record 11.1% in 2007 on higher rents and food costs.

Weekend Recommendations
Barron's:
- Made positive comments on (AAPL), (EPB), (BWP), (OKE), (CS), (PFE), (RNWK), (MSFT) and (PCAR).

Citigroup:

- Reiterated Buy on GOOG, target $590. How much of a severe recession outlook is in GOOG’s stock price? On our severe recession eps of $20, GOOG currently trades at 16.7x p/e, the average S&P p/e of the last two decades. Given the secular growth outlook of internet advertising, GOOG’s strong competitive position within internet advertising, and its identifiable option value, we view this as creating a very attractive risk-reward for long-term investors.

- Reiterated Buy on (AMZN), target $93. How much of a severe recession outlook is in AMZN’s stock price? We go back to the 5-year trough in AMZN’s stock(August ’06), when the macro outlook was much brighter, but AMZN’s fundamental outlook was much poorer. And we conclude that on a price/sales, price/eps & p/fcf basis, AMZN may be within a single-digit % of its recession trough valuation.

- Reiterated Buy on (MRK), target $42.

Night Trading
Asian indices are -1.75% to +1.50% on avg.
S&P 500 futures +3.19%.
NASDAQ 100 futures +2.42%.

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Earnings of Note
Company/Estimate
- (FAST)/.50

- (MHK)/1.12

- (SCHW)/.25

Upcoming Splits

- None of note

Economic Releases

- None of note

Other Potential Market Movers
- None of note

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

Weekly Outlook

Click here for Wall St. Week Ahead by Reuters.

Click here for stocks in focus for Monday by MarketWatch.

There are a few economic reports of note and some significant corporate earnings reports scheduled for release this week.

Economic reports for the week include:

Mon. – None of note

Tues. – IBD/TIPP Economic Optimism Index, weekly retail sales reports, Monthly Budget Statement

Wed. – Weekly MBA Mortgage Applications Report, weekly EIA energy inventory data, Producer Price Index, Advance Retail Sales, Empire Manufacturing, Business Inventories, Fed’s Beige Book

Thur. – Consumer Price Index, Initial Jobless Claims, Net Long-term TIC Flows, Industrial Production, Capacity Utilization, Philly Fed, NAHB Housing Market Index

Fri. – Housing Starts, Building Permits, U. of Mich. Consumer Confidence

Some of the more noteworthy companies that release quarterly earnings this week are:

Mon. – Fastenal(FAST), Mohawk Industries(MHK), Charles Schwab(SCHW)

Tues. – PepsiCo(PEP), Johnson & Johnson(JNJ), Altera Corp.(ALTR), CSX Corp.(CSX), Genentech(DNA), Domino’s Pizza(DPZ), Linear Tech(LLTC), Intel Corp.(INTC), Polaris Industries(PII), Adtran Inc.(ADTN)

Wed. – Coca-Cola(KO), Abbott Labs(ABT), JPMorgan Chase(JPM), Wells Fargo(WFC), AMR Corp.(AMR), JB Hunt(JBHT), Xilinx Inc.(XLNX), eBay Inc.(EBAY), Shaw Group(SGR), Piper Jaffray(PJC), Delta Air(DAL), Novellus Systems(NVLS)

Thur. – Merrill Lynch(MER), Harley Davidson(HDI), United Technologies(UTX), BB&T(BBT), Bank of NY(BK), Citigroup(C), Illinois Tools Works(ITW), Stryker Corp.(SYK), Capital One(COF), Gilead Sciences(GILD), IBM Inc.(IBM), Baxter Intl.(BAX), Google Inc.(GOOG), Southwest Air(LUV), Nucor Corp.(NUE), Hershey Co.(HSY), Intuitive Surgical(ISRG)

Fri. – Honeywell Intl.(HON), Comerica Inc.(CMA), Schlumberger Ltd.(SLB), BlackRock Inc.(BLK)

Other events that have market-moving potential this week include:

Mon. – None of note

Tue. – (JCI) analyst presentation, Lazard Alternative Energy Conference, Wachovia Consumer Growth Conference

Wed. – (UGI) analyst meeting, (GPN) analyst day, (AUY) analyst day, (EW) analyst lunch, (KR) analyst day, (UMH) investor forum, (CHK) analyst meeting, Lazard Alternative Energy Conference, Wachovia Consumer Growth Conference

Thur. – (CHK) analyst meeting, (UMH) investor presentation

Fri. – None of note

BOTTOM LINE: I expect US stocks to finish the week modestly higher on bargain-hunting, technical buying, less credit market angst, diminishing financial sector pessimism and short-covering. My trading indicators are giving neutral signals and the Portfolio is 100% net long heading into the week.

Market Week in Review

S&P 500 899.22 -18.20%*

Click here for the Weekly Wrap by Briefing.com.

*5-Day Change

Weekly Scoreboard*

Indices
S&P 500 899.22 -18.20%
DJIA 8,451.19 -18.15%
NASDAQ 1,649.51 -15.30%
Russell 2000 522.48 -15.65%
Wilshire 5000 9,088.30 -18.02%
Russell 1000 Growth 374.77 -16.60%
Russell 1000 Value 479.23 -19.83%
Morgan Stanley Consumer 544.77 -14.50%
Morgan Stanley Cyclical 585.98 -15.43%
Morgan Stanley Technology 363.35 -15.93%
Transports 3,744.74 -9.43%
Utilities 324.57 -21.17%
MSCI Emerging Markets 24.66 -21.2%

Sentiment/Internals
NYSE Cumulative A/D Line 20,609 -34.11%
Bloomberg New Highs-Lows Index -6,667 -256.71%
Bloomberg Crude Oil % Bulls 30.0 -10.0%
CFTC Oil Large Speculative Longs 165,772 -14.0%
Total Put/Call 1.23 +10.81%
OEX Put/Call 1.18 +78.79%
ISE Sentiment 108.0 -9.24%
NYSE Arms .91 -24.2%
Volatility(VIX) 69.95 +54.96%
G7 Currency Volatility (VXY) 19.79 +35.73%
Smart Money Flow Index 5,795.85 -25.14%
AAII % Bulls 31.47 -5.58%
AAII % Bears 60.84 +10.62%

Futures Spot Prices
Crude Oil 77.70 -16.65%
Reformulated Gasoline 180.70 -18.44%
Natural Gas 6.54 -11.33%
Heating Oil 221.0 -16.27%
Gold 859.0 +2.11%
Base Metals 156.09 -12.67%
Copper 214.45 -17.96%
Agriculture 295.69 -10.21%

Economy
10-year US Treasury Yield 3.87% +26 basis points
10-year TIPS Spread .93% -54 basis points
TED Spread 4.64 +76 basis points
N. Amer. Investment Grade Credit Default Swap Index 207.13 +24.44%
Emerging Markets Credit Default Swap Index 629.49 +57.50%
Citi US Economic Surprise Index -6.90 -675%
Fed Fund Futures imply 72.0% chance of 25 basis point cut, 28.0% chance of 50 basis point cut on 10/29
Iraqi 2028 Govt Bonds 60.75 -7.60%
4-Wk MA of Jobless Claims 482,500 +1.7%
Average 30-year Mortgage Rate 5.94% -16 basis points
Weekly Mortgage Applications 465,500 +2.22%
Weekly Retail Sales +1.3%
Nationwide Gas $3.35/gallon -.25/gallon
US Cooling Demand Next 7 Days 19.0% above normal
ECRI Weekly Leading Economic Index 120.60 -1.31%
US Dollar Index 83.0 +3.34%
Baltic Dry Index 2,221 -16.29%
CRB Index 289.89 -11.22%

Best Performing Style
Small-cap Growth -15.58%

Worst Performing Style
Large-cap Value -19.83%

Leading Sectors
Road & Rail -6.55%
REITs -9.42%
Restaurants -12.46%
Semis -14.22%
Wireless -14.39%

Lagging Sectors
I-Banks -25.60%
Gaming -26.25%
Energy -26.40%
Insurance -26.96%
Oil Service -30.27%

One-Week High-Volume Gainers

One-Week High-Volume Losers

*5-Day Change

Stocks Finished Mixed as Gains in Airline, REIT, Restaurant and Financial Stocks Offset Losses in Medical, Utility and Energy Stocks

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