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

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Internet longs, Medical longs and Biotech longs. I added to my (IWM)/(QQQQ) hedges this morning and then covered them, covered some of my EEM short and covered some of my commodity shorts 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, almost every sector is declining and volume is above average. Investor anxiety is still very elevated. Today’s overall market action is bearish. The VIX is rising 14.98% and is still historically elevated at 63.45. The ISE Sentiment Index is below average at 116.0 and the total put/call is above average at 1.07. Finally, the NYSE Arms has been running very high most of the day, hitting 3.17 at its intraday peak, and is currently 2.05. The Euro Financial Sector Credit Default Swap Index is rising 9.7% today to 95.4 basis points. This index is up from a low of 52.66 on May 5^th, but down significantly from 157.81 on Sept. 16^th. The North American Investment Grade Credit Default Swap Index is rising 5.2% to 185.18 basis points. The TED spread is falling .3% to 435 basis points. The 2-year swap spread is rising 11.5% to 139.5 basis points. The Libor-OIS spread is dropping .5% to 342 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 4 basis point to .99%, which is down 164 basis points in just over three months and at the lowest level since February 1999. The steep decline in the (XLF), given recent government action, is a big negative. I suspect we could see more weakness here in the morning after another weak night in Asia, however another sharp rally in US shares is likely very close. Nikkei futures indicate a -800 open in Japan and DAX futures indicate a -31 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering and bargain-hunting.

Today's Headlines

Bloomberg:
- Federal Reserve Chairman Ben S. Bernanke said government efforts to calm financial markets and stem the credit crisis probably won't result in an immediate economic rebound.

- The U.S. Securities and Exchange Commission agreed to back an effort by banks that may delay writedowns on some securities tied to losses that have cost companies more than $640 billion. Banks in certain cases may account for perpetual preferred securities as debt, allowing them to postpone writing down their value, SEC Chief Accountant Conrad Hewitt wrote in a letter yesterday to Financial Accounting Standards Board Chairman Robert Herz.

- Tumbling prices for energy, metals and grains led commodities lower as the prospect of a global recession dimmed the outlook for raw-material demand. Crude oil, down as much as 5.2 percent, dipped below $75 a barrel for the first time in more than a year. Copper fell more than 8 percent, soybeans reached a 13-month low and cotton neared the lowest price since May 2007.

- Brazilian stocks dropped, halting their biggest rally this decade, on concern slowing global growth will hurt demand for raw materials and reduce the earnings of the nation's biggest commodity producers.

- Cement producers in Russia are cutting back plans for new plants as the financial crisis derails construction projects and imports may more than double, an industry group said.

Wall Street Journal:

- By his own account, Mr. Obama wrote a letter to the Treasury Secretary, allegedly putting himself on record that subprime loans were dangerous and had to be dealt with. This is revealing; if true, it indicates Sen. Obama knew there was a problem with subprime lending -- but was unwilling to confront his own party by pressing for legislation to control it. As a demonstration of character and leadership capacity, it bears a strong resemblance to something else in Sen. Obama's past: voting present.

- Chesapeake Energy Corp.(CHK), this year’s worst-performing independent petroleum producer in the S&P 500, is in talks to sell some natural-gas assets to BP Plc(BP).

CNBC.com:
- Emerging markets suffer as foreigners withdraw. The Institute of International Finance, a consortium of global financial services firms based in Washington D.C., estimates that private sector capital flows to 30 emerging market nations across the world will fall by nearly a third from last year to $619 billion this year. Next year, they predict the sum will fall by another $60 billion. Chakraborty said he doubts the boom years will be back anytime soon.We are, he said, entering an era of slower growth, which will be reflected in lower stock market valuations."The fundamentals have changed," he said.

Philly.com:

- In a small office in West Conshohocken, a legendary stock market bottom feeder has been having a feast. John B. Neff, who racked up record gains as manager of Vanguard's Windsor Fund over three decades, is buying stocks again. And while the actions of one person may mean little in a multitrillion-dollar market, Neff's renewed romance with stocks signals that, to him, the worst is over.

Chicago Tribune:

- A federal appeals court ordered Ohio's top elections official to set up a system by Friday to verify the eligibility of newly registered voters and make the information available to the state's 88 county election boards. The full 6th U.S. Circuit Court of Appeals in Cincinnati on Tuesday upheld a lower court ruling that Secretary of State Jennifer Brunner must use other government records to check thousands of new voters for registration fraud.

- For the first time since oil prices began their meteoric rise this year, airlines are slashing fuel surcharges on a major international route: most flights between the U.S. and Europe.

- American troops acting on a tip killed the No. 2 leader of al-Qaida in Iraq — a Moroccan known for his ability to recruit and motivate foreign fighters — in a raid in the northern city of Mosul, the U.S. military said Wednesday.

Reuters:
- Commodity funds are struggling to regain a footing after a record fall in futures prices last week suggested to many that more liquidation could be in store for a sector that lost up to $60 billion (34 billion pounds) in the last quarter. Goldman Sachs (GS), the Wall Street powerhouse that made its name by predicting almost every commodities rally over the last six years, said Monday it had "underestimated" the impact of the current credit crisis on commodities' demand.Goldman earlier this year put a high of $200 on a barrel of crude oil by 2010 when the market was trending near $150. On Tuesday, U.S. crude fell more than 3 percent to close at $78.63 a barrel -- sharply off July's record high above $147."Should the financial and evolving economic crisis cut deeper into demand, the market could fall as low as $50, which we believe to be the industry's cash cost and shut in level," Goldman said in Monday's note.

Financial Times:
- Tom Albanese, Rio Tinto’s(RTP) chief executive, on Wednesday warned about the health of China and said the slowdown in one of the world’s fastest growing economies had led the mining company to revise its capital spending plans. Mr Albanese said there had been a marked reduction in Chinese commodity demand from the overheated levels of 2007 and added that the “vast majority of Chinese aluminium producers are now making operating losses.”

Kommersant:

- Russian banks are starting to limit customer withdrawals in a bid to avoid a run on deposits.

Valor Economico:

- Poultry farmers in Santa Catarina state, Brazil’s second-largest producer, should cut output by 5% because the global financial turmoil is reducing demand, an industry leader said. “We don’t know what’s going to happen, but we know that all the companies were ready to fulfill strong demand that may not exist,” said Ricardo Gouvea, the director of the state’s poultry producers’ association and of the meat packers association. Brazil is the world’s largest poultry exporter.

Press TV:

- Iran expects OPEC to cut production at its extraordinary meeting in Vienna on Nov. 18, saying such a step would be the “best decision.”

Etemaad:

- Iranian President Mahmoud Ahmadinejad said the next US president needs to improve ties with the Persian Gulf country.

Bear Radar

Style Underperformer:
Mid-cap Growth (-6.28%)

Sector Underperformers:
Oil Service (-12.81%), Steel (-12.52%) and Construction (-10.96%)

Stocks Falling on Unusual Volume:
CHK, RIO, PBR, TLK, LLTC, ICLR, MCHP, CENX, ISRG, EBAY, ISIL, AAUK, AMZN, OC, JNY, PUK, PHG, MTA, RGS, WBD, NRT, MTX, SI and PKX

Stocks With Unusual Put Option Activity:
1) LLTC 2) DHR 3) MAS 4) SWN 5) DO

Bull Radar

Style Outperformer:
Large-cap Growth (-4.32%)

Sector Outperformers:
Airlines (-.38%), Biotech (-1.09%) and Computer Services (-1.97%)

Stocks Rising on Unusual Volume:
WFC, ASML, ALTR, OZRK, AAPL, HCBK and DLTR

Stocks With Unusual Call Option Activity:
1) NRG 2) DHR 3) ADI 4) DOX 5) FLEX

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Intel Corp.(INTC) posted higher-than- anticipated third-quarter profit and said sales may rise in this period on demand for laptops, easing concern that the credit meltdown will curb orders and sending the shares higher. ``The results were excellent,'' said Michael Shinnick, a portfolio manager at 1st Source Bank in South Bend, Indiana, which owns Intel shares. ``It should reassure people that PC demand did not fall off a cliff during the third quarter.'' Intel rose 71 cents, or 4.5 percent, to $16.64 in late trading after closing at $15.93 on the Nasdaq Stock Market.

- Lehman’s Hedge Fund Clients Face Margin Calls on Frozen Assets. Lehman Brothers Holdings Inc.’s(LEH) hedge-fund clients may have to pay more collateral on $65 billion of assets frozen when the investment bank went bankrupt a month ago. Lehman's London-based prime brokerage has about 3,500 active clients including hedge funds that own about $45 billion in securities, Steven Pearson, the partner at PricewaterhouseCoopers responsible for unraveling the unit, said in an interview. They hold an additional $20 billion in short positions, or bets that prices will fall. While investors are largely unable to access their Lehman accounts, the value of the securities continues to fluctuate along with the markets. The clients may be required to put up more collateral if the value of those securities drops, a process known as a margin call. ``Every second that they waste hurts,'' said Edward Chin, who runs Pride Revelation Fund, one of dozens of hedge funds in Hong Kong that used Lehman as their sole prime broker. ``We're looking at many hedge funds that will have to shut down, but they can't even shut down because they don't know what they have left. The thing is I cannot now even liquidate the fund.''

- Genentech Inc.(DNA), the U.S. cancer-drug maker being pursued by its majority owner Roche Holding AG, said third-quarter profit rose 6.7 percent as sales of its tumor- fighting medicines beat analysts' estimates. Shares of Genentech rose $2.63, or 3.3 percent, to $81.75, at 6:02 p.m. in extended trading on the New York Stock Exchange.

- Posco(PKX), Asia's third-biggest steelmaker, fell in Seoul trading after warning that demand will decline this quarter and three brokerages including JPMorgan Chase & Co. said profits and prices may deteriorate.

Wall Street Journal:
- Sen. John McCain expanded his response to the financial crisis by proposing new tax cuts for investors, including a sharp, temporary reduction of the capital-gains tax and breaks aimed at older Americans who may need to cash in assets while the market is down.

- Barack Obama and John McCain each said Tuesday that he would put his own stamp on the massive financial-rescue plan, going beyond buying up bank stocks and distressed assets to exert influence on how the firms are structured and managed.

- Thousands of suspicious voter registrations turned in by a group called Acorn have become a rallying cry for Republicans, who claim left-leaning activists may be trying to rig votes in the 2008 elections. Faulty registrations in recent months include those in the names of Mickey Mouse in Florida, Batman in New Mexico and Dallas Cowboys football players in Nevada. State and federal authorities have opened investigations in about a dozen states; as many as 16,000 registrations in Pennsylvania are under suspicion.

- When the real-estate market was booming, General Electric Co.'s(GE) commercial-property business earned the nickname "the honey pot" among insiders because the company could increase earnings simply by selling a building or two. But now, the opposite is true: GE's difficulty selling its office buildings, shopping centers and other commercial property is dragging down its financial results.

MarketWatch.com:
- Cisco Systems Inc.(CSCO) Chief Executive John Chambers told a huge crowd Tuesday at the Gartner ITxpo that there won't be any cutbacks at his company, despite industry concerns of lower tech spending.

CNNMoney.com:
- Overnight lending rate falls. Bank-to-bank rates decline, indicating that the global efforts to ease pressure in the credit markets may be working.

Business Week:

- Bloomberg Hires TV Vet Andy Lack. Expect Them To Go Bigger Online And On TV.

hedgeweek:

- Up to 1,000 hedge funds could close in aftermath of market turmoil, says Tabb report. In the future, investment banking will be more tightly regulated and dominated by risk-averse commercial banks, while new firms that are structured as partnerships but are much smaller will take on many of the industry's more risky (but well remunerated) activities, according to industry analyst Larry Tabb.

Reuters:

- The average U.S. retail gasoline price fell 33.3 cents over the last week to $3.15 a gallon, the biggest price decline ever recorded by the government, the Energy Department said on Tuesday. Gasoline demand is off 5.3 percent from a year ago, and crude oil costs have fallen to $79 a barrel from a peak of more than $147 in July. "Right now, I don't know any of us that have seen reductions in price or reductions in demand at the almost warp speed that we're seeing at the present time," Red Cavaney, president of the American Petroleum Institute, said. Cavaney would not speculate how low pump prices could go, but he said the drop in petroleum demand will "put incredible downward pressure" on fuel costs.

- An unprecedented cash crunch is choking the ability of banks to lend and creating an opportunity for hedge funds to launch, or ramp up corporate lending facilities. Companies that have relied on bank borrowing to grow, or even maintain their business, are turning to hedge funds in a move that some say may signal a broad shift of lending from banks to asset managers.

- General Motors Corp's (GM) Brazilian market will grow by much less in 2009 and exports at its Brazilian unit will be hit by the financial crisis, the automaker's chief executive in Brazil said on Tuesday. Jaime Ardila said GM's Brazilian market would grow up to 5 percent in 2009 compared with an expected growth of more than 20 percent in 2008, when it was forecast to sell around 600,000 units.

Financial Times:
- The rescue plan unveiled by the US authorities to protect the nation's banks represents "a major step towards stabilizing the system", Hank Paulson told the Financial Times. In an interview, the US Treasury secretary said "for the first time you have seen an action that is systematic, that is getting at the root causes" of the financial crisis.

The Standard:

- Consumer confidence has plummeted in Hong Kong to the 2003 SARS levels, according to a Chinese Univ. of Hong Kong survey.

South China Morning Post:

- Hong Kong’s office sales fell to a five-year low as investors cancelled purchases or reopened negotiations on concern that occupancy rates will decline as the economy weakens. Third-quarter sales slumped 41% to 476 deals, the least since the final quarter of 2003, citing Centaline Property Agency Ltd.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (AAPL), target $170.

Night Trading
Asian Indices are -2.50% to -.50% on average.
S&P 500 futures -1.67%.
NASDAQ 100 futures -.44%.

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Earnings of Note
Company/EPS Estimate
- (KO)/.77

- (ABT)/.78

- (STT)/1.20

- (DAL)/.02

- (SCHW)/.24

- (JPM)/-.18

- (STJ)/.57

- (WFC)/.40

- (EBAY)/.41

- (NVLS)/.04

- (XLNX)/.37

- (STLD)/1.10

- (PJC)/-.40

- (AMR)/-1.41

Economic Releases
8:30 am EST

- The Producer Price Index for September is estimated to fall .4% versus a .9% decline in August.

- The PPI Ex Food & Energy for September is estimated to rise .2% versus a .2% gain in August.

- Advance Retail Sales for September are estimated to fall .7% versus a .3% decline in August.

- Retail Sales Less Autos for September are estimated to fall .2% versus a .7% decline in August.

- Empire Manufacturing for October is estimated to fall to -10.0 versus -7.4 in September.

10:00 am EST

- Business Inventories for August are estimated to rise .5% versus a 1.1% gain in July.

2:00 pm EST

- Fed’s Beige Book

Upcoming Splits
- None of note

Other Potential Market Movers
- The (GPN) analyst day, (AUY) analyst day, (EW) analyst lunch, (KR) analyst day, (UMH) investor presentation, (CHK) analyst meeting, weekly MBA mortgage applications report, Lazard Alternative Energy Conference and the Wachovia Consumer 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 lower and to rally into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.