Friday Watch

Late-Night Headlines
Bloomberg:
- The cost of protecting Asia-Pacific bonds from default fell after money market rates declined and U.S. stocks rallied. The Markit iTraxx Japan index fell 7 basis points to 200 at 9:04 a.m. in Tokyo, according to prices from Credit Suisse Group AG. ``The market is starting to believe that central banks' policy actions are taking out some of the financial systemic risk,'' said Craig Saalmann, a Sydney-based credit strategist with JPMorgan Chase & Co. The three-month London interbank offered rate for dollars fell 5 basis points to 4.5 percent yesterday, the fourth consecutive drop and the longest sequence of decline since June. The spread on the Markit CDX North America Investment-Grade index of 125 companies in the U.S. and Canada fell 2 basis points to 198, according to broker Phoenix Partners Group. The Markit iTraxx Australia index declined 12.5 basis points to 215 at 11:37 a.m. in Sydney, Citigroup Inc data show. The Asia index of 50 investment-grade borrowers outside Japan was 15 basis points lower at 300, while the high-yield benchmark shed 40 basis points to 925 at 8:11 a.m. in Hong Kong, according to Morgan Stanley.

- Investors should buy more Fannie Mae(FNM) and Freddie Mac(FRE) mortgage bonds because US government actions to shore up financial companies are potential “game changers,” according to Credit Suisse Group.

- The U.S. Treasury's pledge to inject $250 billion into banks may coax private-equity leaders Stephen Schwarzman, David Rubenstein and Henry Kravis to resume investing after more than a year spent mostly on the sidelines. The founders of Blackstone Group LP, Carlyle Group and KKR & Co. LP told investors in Dubai this week that the biggest government intervention in the financial system since the 1930s will help attract private capital to lenders.

- U.S. government plans to inject capital into banks and other ``powerful'' efforts to unblock credit should revive economic growth next year, Federal Reserve Bank of Boston President Eric Rosengren said.

- Google Inc.(GOOG), owner of the most popular Internet search engine, said third-quarter profit climbed 26 percent as more customers used Web search ads to spur sales in a slowing economy, sending the shares 10% higher in after-hours trading. Advertisers are shifting budgets away from TV and print media toward ads that run alongside search listings, targeting online shoppers. The Internet will account for 8.7 percent of the $284 billion in U.S. ad spending this year, up from 7.2 percent in 2007, according to Barclays Capital.

- The FBI is looking into accusations of voter fraud involving a grassroots organization highlighted in last night's presidential debate, the Associated Press said, citing law enforcement officials. The FBI is examining possible evidence of a coordinated nationwide effort by the Association of Community Organizations for Reform Now, or ACORN, to commit fraud, the AP reported. In the debate, Republican presidential nominee John McCain said Democratic rival Barack Obama should reveal the full extent of his relationship with ACORN. Obama said he represented the group in a motor-voter case and had no other ties. Some employees have been accused of submitting false voter registration forms with names such as Mickey Mouse and those of Dallas Cowboys football players.

- Investors withdrew a record $43 billion from hedge funds in September as they fled distressed-securities and stock funds because of poor performance, TrimTabs Investment Research said today. The estimated outflows were the most since TrimTabs started tracking the industry in 2000, Chief Executive Officer Charles Biderman said in an interview.

- China Shipping Container Lines Co., the country's second-largest container line, forecasts traffic will plunge, as a global economic slowdown curbs demand for Chinese goods in North America and Europe.

- The U.S. economy will grow 2 percent at most in 2009, a second year of ``sluggish'' expansion, a majority of chief executive officers forecast in a survey completed before the government approved a $700 billion bailout plan to rescue the U.S. financial system.

- Vladimir Putin came to power in 2000 vowing to destroy Russia's oligarchs ``as a class.'' Within two years, he'd driven two into exile and imprisoned another. Now, he may use the global markets meltdown to finish the job.

Wall Street Journal:
- General Motors Corp.(GM) and Chrysler LLC are accelerating merger discussions amid strong support from potential lenders that are eager to see a deal done.

- Mideast and Chinese money is back. After largely staying on the sidelines during the past few tumultuous weeks of the global financial crisis, the cash-rich governments of the Persian Gulf and China appear to be getting back in the game. The Qatar Investment Authority, with an estimated $65 billion war chest, on Thursday led a capital injection of 10 billion Swiss francs ($8.83 billion) into Credit Suisse Group. The investment will boost Qatar's stake in the Swiss banking giant to something under 10%, from just under 2%, according to a person familiar with the situation.

- Signs that the U.S. economy is using less and less oil sent world crude prices below $70 a barrel for the first time in 14 months, a dramatic turnaround for a market that not long ago had some analysts predicting $200-a-barrel oil as early as next year. Rattled by the swift price drop and evidence of plunging demand, members of the Organization of Petroleum Exporting Countries hastily agreed Thursday to meet next week in Vienna to weigh a production cut, in a bid to firm up prices. If the price stabilizes at around $80 a barrel, as many now expect, "that will amount to essentially a $275 billion stimulus package to the U.S. economy," says Lawrence Goldstein, an analyst with the Energy Policy Research Foundation. Hedge funds, responsible for a large amount of the speculation in crude oil, have had to play defense in the credit crisis lately by unwinding trades that use a lot of borrowed money, such as oil futures bets. Hedge funds are also being hit by heavy redemptions as risk-averse investors cash out. This forces funds to sell at inopportune times, adding to the spiral. For the first time since the last U.S. recession in 1991-92, world oil demand this year could end up being essentially flat. Many private forecasters went into the year predicting that world oil demand would jump by around 1.3 million barrels a day in 2008. As prices soared in the spring, Goldman Sachs went so far as to predict that robust demand and crimped supply could send prices to more than $200 a barrel by next year. Even as gasoline prices are now heading back toward $3 a gallon, and below, in most states, analysts expect demand to keep falling. MasterCard said that by its estimates gasoline sales in the week of Oct. 10 dropped 9.4% from a year ago.

- Some hedge-fund managers are coming under increased pressure to liquidate their positions as banks ask for more collateral to back funds' borrowing. The changes are hitting a number of funds across the industry, which experienced its latest blow Thursday, when Dallas-based Highland Capital Management LP said it was closing of two of its five hedge funds, which managed about $1.5 billion of Highland's $38 billion war chest.

- Food Companies May Profit From Decline in Commodities.

NY Times:
- Google(GOOG) on Thursday quietly appointed David Rosenblatt, the former chief executive of DoubleClick, as president for global display advertising, a new position. His appointment may signal that Google, whose business is built almost entirely on small text ads that appear next to search results and on partner Web sites, is getting ready to accelerate its push in the display advertising market.

Business Week:

- The European Commission on Wednesday (15 October) changed EU accounting rules to help banks avoid sharp drops in the value of their assets at times of market volatility, such as the present financial crisis. The move on "mark-to-market" accounting—made by the commission's accounting regulatory committee—has unanimous support from EU member states and will apply for 2008 third quarter corporate results, due to be published soon.

Forbes.com:
- Biotechnology company Gilead Sciences Inc.(GILD) on Thursday said its third-quarter profit shot up 27 percent, as sales of its drugs to treat HIV soared. The results topped Wall Street's expectations, and shares gained in after-hours trading.

USA Today.com:

- More than 50 million seniors will see their Social Security benefits increase 5.8% next year, the biggest cost-of-living increase in more than 25 years, the Social Security Administration said Thursday. The cost-of-living increase will boost the average retiree's benefit check by $63 a month. The average retired couple will see an increase of $103 a month.

Reuters:

- The allure of heavily-battered stocks has grown so strong that some of Wall Street's most prominent investors are dipping their toes into the market, suggesting the brutal declines may be over the worst. Jeremy Grantham, Bill Ackman, Chris Orndorff and Bob Doll are some of the savviest U.S. money managers who are betting that equities have fallen to levels far below their intrinsic value. "Things have just gotten a bit silly," said Chris Orndorff, who helps oversee $50 billion in assets as managing principal at Payden & Rygel Investment Management in Los Angeles. "We are very, very close to a bottom in equities."

- Intuitive Surgical Inc(ISRG) said on Thursday that its third-quarter profit rose a better-than-expected 41 percent on surging sales of its da Vinci robotic surgical systems. "These results reflect the continued adoption of robotic surgery as a growing number of patients benefit from the improved clinical outcomes and reduced surgical trauma that our da Vinci products enable," Chief Executive Lonnie Smith said in a statement.

TimesOnline:
- Hedge fund managers are paranoid. And they are right to be. The other day I had lunch with a senior financial official whose view of hedge funds was simple. “They were a con. The returns were all due to leverage. And now that the leverage has gone everyone will see they were a con.” You may disagree with this analysis. You may be convinced that for some hedge funds at least the returns were down to skill. You may argue that their role in the credit crisis has been at worst neutral. But you cannot deny it is pretty worrying for hedge funds when this is the view of a top regulator.

Daily Telegraph:

- Prime brokers have this week hiked up the cost of trading for hedge funds. The move has pushed some funds closer to the brink and triggered yet more havoc in global stock markets. The bankers say that the wild swings in stock prices across the globe has radically increased their risk, forcing them to demand as much as five times more collateral from the hedge funds. The extra demand has left funds scrambling to find the extra cash or collateral, forcing many to sell other positions to fund their more important ones.

AFP:

- US computer giant IBM on Thursday reported third-quarter earnings slightly better than analysts' expectations and said it was confident for the remainder of the year despite the slowing economy. Net profits rose 19.6 percent in the third-quarter, compared with the same period last year, to 2.8 billion dollars while revenue rose five percent to 25.3 billion dollars, IBM said in a statement.

Late Buy/Sell Recommendations
Citigroup:
- Upgraded (FL) to Buy, target $17.
- Reiterated Buy on (GOOG), target $590.

- Reiterated Buy on (FISV), target $59.

- Reiterated Buy on (GILD), target $59.

- Reiterated Buy on (POT), target $210.

Night Trading
Asian Indices are -1.25% to +1.75% on average.
S&P 500 futures +.6%.
NASDAQ 100 futures unch.

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Earnings of Note
Company/EPS Estimate
- (CMA)/.27

- (HON)/.95

- (NVR)/7.22

- (SLB)/1.25

- (VFC)/2.03

Economic Releases
8:30 am EST

- Housing Starts for September are estimated to fall to 872K versus 895K in August.

- Building Permits for September are estimated to fall to 840K versus 857K in August.

10:00 am EST

- Preliminary Univ. of Mich. Consumer Confidence for October is estimated to fall to 65.0 versus 70.3 in September.

Upcoming Splits
- None of note

Other Potential Market Movers
- None of note

BOTTOM LINE: Asian indices are mostly higher, boosted by automaker and financial stocks in the region. I expect US equities to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.

Stocks Finish at Session Highs on Strong Volume, Boosted by Airline, Steel, REIT, Restaurant, Biotech, Energy and Technology Shares

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In Play

Stocks Reversing Higher into Final Hour on Heavy Volume, Boosted by Declining Credit Angst, Short-Covering and Bargain-Hunting

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Medical longs, Retail longs and Biotech longs. I covered all my (IWM)/(QQQQ) hedges, sold a trading long and added to my (GOOG) long this morning, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are gaining and volume is heavy. Investor anxiety is still very elevated. Today’s overall market action is very bullish. The VIX is rising 6.99% and is still historically elevated at 73.99. The ISE Sentiment Index is very low at 85.0 and the total put/call is very high at 1.21. Finally, the NYSE Arms has been running very high most of the day, hitting 3.44 at its intraday peak, and is currently .88. The Euro Financial Sector Credit Default Swap Index is falling 1.12% today to 94.33 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 6.9% to 202.19 basis points. The TED spread is falling 6.25% to 407 basis points. The 2-year swap spread is falling 1.63% to 136.75 basis points. The Libor-OIS spread is dropping 1.34% to 339 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 5 basis points to .94%, which is down 169 basis points in just over three months and at the lowest level since February 1999. The fact that equities and commodities are decoupling today is a large positive. Investors may finally be acknowledging the hugely positive implications that rapidly decelerating inflation has for US equities. Gold continues to trade horrifically, in my opinion, given recent events. Gauges of credit angst continue to trend lower, which is also a large positive. Recent actions should be enough to meaningfully improve credit conditions given time. I still believe an extraordinary amount of bad news is factored into US stock prices at current levels. I suspect US stocks can build on today’s gains tomorrow as earnings reports after the close aren’t as bad as feared. Nikkei futures indicate an +220 open in Japan and DAX futures indicate an +207 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, decelerating inflation, diminishing credit angst and bargain-hunting.

Today's Headlines

Bloomberg:
- The benchmark index for U.S. stock options exceeded 80 for the first time in its 18-year history, driven higher by equities extending the biggest slide since 1987 on concern the economy will continue deteriorating. Europe's volatility benchmarks also jumped to records. The VIX, as the Chicago Board Options Exchange Volatility Index is known, rose a third day, adding 9.6 percent to 75.92 at 12:50 p.m. in New York after climbing as high as 81.17.

- Money-market rates in London fell after central banks provided $254 billion of emergency cash to ease the paralysis in the credit markets and UBS AG got a $59 billion government bailout. The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars declined for a fourth day, sliding 5 basis points, or 0.05 percentage point, to 4.50 percent today, the British Bankers' Association said. The overnight rate fell 20 basis points to 1.94 percent, the lowest level since November 2004 though still 44 basis points above the Federal Reserve's target. Asian rates also dropped.

- Emerging-market banks plunged after Standard & Poor's warned that South Korean lenders will struggle to refinance debt, raising pressure on developing nations to bail out their own institutions. All emerging stock markets fell, led by declines in Russia, South Korea, Peru, Hungary and Brazil.

- U.S. Treasury Secretary Henry Paulson said his plan to inject capital into financial companies is focused on banks and thrifts, indicating unregulated firms such as hedge funds won't initially get government aid.

- Tumbling prices for energy and metals led commodities to their lowest since September 2004 on signs of plunging demand for raw materials as the U.S. economy slows. Crude oil fell as much as 8 percent, dropping below $70 a barrel in New York for the first time since August 2007. Gold dipped below $800 an ounce for the first time in four weeks. The Reuters/Jefferies CRB Index of 19 commodities fell as much as 3.2 percent to 273.95, the lowest since Sept. 21, 2004. ``Global conditions are no longer commodity-supportive,'' analysts at Standard Chartered Plc wrote in a report today. ``Demand for commodities is already suffering and we expect further weakness.''

- Morgan Stanley(MS) Chief Executive Officer John Mack said tumbling markets may drive some hedge funds out of business. ``Some of my friends in that community say that by year- end, you'll see the number of firms in the hedge-fund area shrink, I've heard as large as 30 percent,'' Mack, 63, told CNBC today.

- Microsoft Corp.(MSFT) Chief Executive Officer Steve Ballmer said a deal with Yahoo! Inc.(YHOO) may still make economic sense for shareholders of both companies, pushing Yahoo stock up as much as 17 percent.

- Highland Capital Management LP will close its flagship Highland Crusader Fund and another hedge fund after losses on high-yield, high-risk loans and other types of debt, according to a person with knowledge of the decision.

- Andy Lipow, president of Lipow Oil Associates LLC, says oil may fall to $65/bbl. (video)

- US farmers probably will apply less fertilizer per acre on crops next year to reduce costs amid falling wheat, corn and soybean prices, said Mike Rahm, Mosiac Co.’s(MOS) vice president of market analysis.

- Gold declined to a one-month low on speculation that investors will sell the precious metal to cover losses in other markets. Silver fell to the lowest since February 2006.

Wall Street Journal:

- In the campaign's final two weeks, voters will take a last serious look at both presidential candidates. The outcome of the race isn't cast in stone yet.

NY Post:

- The bankers, Joseph Sauvage, Todd Guenther and Jack Paris, who had been brought into Barclays Capital as a part of its purchase of Lehman, are expected to start work at Citi next month.

- Renowned New York hedge-fund honcho and political powerbroker Richard Perry is facing down his first losing year in hedge-fund investing since launching his fund some 20 years ago. The ex-Goldman Sachs billionaire manager of Perry Capital is shrinking his staff and battening down the hatches at his firm, which boasts tony digs in the General Motors Building. His flagship fund Perry Partners International recorded a third-quarter loss of 6.13 percent, bringing his year-to-date performance down 9.32 percent, according to people familiar with the matter.

MSNBC.com:
- The FBI is investigating whether federal money was misused when Democratic Congressman Tim Mahoney hired a mistress to work in his office, a senior federal law enforcement official said Thursday. Federal agents also are examining whether a second affair Mahoney was having with a high-level official in his Florida district was behind his push for federal funds for her county.

Powerpage.org:

- Apple(AAPL) to Release Revised 17” MacBook by Early 2009.

CFO.com:

- Few who know anything about executive compensation, it seems, are fans of how the government's financial-services rescue programs address the issue.

SF1 television:
- UBS AG(UBS) CEO Marcel Rohner said the worst is “definitely” over for Switzerland’s largest bank after the country’s government agreed to a $59.2 billion package to relieve it of toxic assets. While the bank’s losses have “clearly” damaged confidence in UBS, today’s announcement means “the problem of illiquid assets is definitely solved” for the bank, Rohner said.

Bear Radar

Style Underperformer:
Mid-cap Value (-1.87%)

Sector Underperformers:
Gold (-10.16%), Insurance (-8.10%) and Papers (-6.86%)

Stocks Falling on Unusual Volume:
ITRI, EBAY, ITMN, JOYG, GOOG, AAUK, EEFT, PAAS, CPRT, CYBS, RGLD, WY, MR, KNM, GG and POT

Stocks With Unusual Put Option Activity:
1) JDSU 2) EK 3) AES 4) CCK 5) MAS

Bull Radar

Style Outperformer:
Small-cap Growth (-2.65%)

Sector Outperformers:
Airlines (+1.51%), Restaurants (-1.10%) and Wireless (-1.43%)

Stocks Rising on Unusual Volume:
SPTN, RYAAY, CENX, PLCM, SPWRA, FSLR, ISRG, TEVA, GILD, DECK, QCOM, ENER, FEIC, PACW, HAYN, CPO and HIT

Stocks With Unusual Call Option Activity:
1) TSM 2) CX 3) AMAG 4) VRTX 5) SII