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Tuesday Watch

Late-Night Headlines
Bloomberg:
- Stephen Schork, president of the Schork Report, sees a ‘good chance’ of $50 crude oil by year’s end. (video)

- National Australia Bank Ltd., the nation's biggest by assets, said commodity prices may decline ``sharply'' amid expectations global economic conditions will continue to deteriorate. ``Global commodity prices are already falling and their elevated starting levels shows the potential for them to fall sharply and still be high by historical standards,'' the Melbourne-based company said today in a statement. The bank, the largest lender to Australian farmers, today reported full-year profit dropped 11 percent. The pace of growth in big emerging economies should slow considerably through the next two years, National Australia said today.

- Threats of a ``global catastrophe'' have declined in recent weeks as policy makers around the world work to restore liquidity and confidence in the financial system, Australian central bank Governor Glenn Stevens said. ``At moments like this, it's hazardous to make predictions,'' Stevens said today in a speech in Sydney. ``However, it seems to me that the key elements of dealing with the root issues in the crisis are starting to come into place.''

- Investors should sell the euro versus the dollar because the European Central Bank is likely to cut its benchmark rate toward 2.5 percent as oil prices fall and growth slows, Citigroup Global Markets Inc. said. ``We believe that there is potentially a perfect storm building against the euro,'' wrote Tom Fitzpatrick, New York- based global currency head of strategy at Citigroup Global Markets, in a research note yesterday. The currency may fall to ``at least $1.28 by year-end and maybe even continue lower in 2009.'' The ECB's target rate of 3.75 percent is ``way too tight in Europe even under a misguided single mandate,'' Fitzpatrick wrote in a separate note dated Oct. 17. The benchmark rate is 1.5 percent in the U.S. and 0.5 percent in Japan.

- Oracle Corp.(ORCL), the world's second- largest software maker, said it will buy back as much as $8 billion in stock after the global financial crisis sent the shares down 20 percent this year. The repurchase brings its total buyback allowance to as much as $9.3 billion, the Redwood City, California-based company said today in a regulatory filing.

- Novartis AG will tap its ``strong cash flow'' to make acquisitions, taking advantage of biotechnology companies' inability to raise capital, said Chief Executive Officer Daniel Vasella.

- Increased risks to Australia's economy and signs that inflation will cool gave the central bank a ``strong economic case'' for this month's 1 percentage point interest-rate cut, the biggest since a recession in 1992. ``The material change to the balance of risks surrounding the outlook for growth and inflation in Australia meant that a significantly less-restrictive stance of monetary policy was now appropriate,'' members of the Reserve Bank's board said in minutes of their Oct. 7 meeting, released in Sydney today.

- Texas Instruments Inc.(TXN), the second- largest U.S. semiconductor maker, reported a 27 percent decline in third-quarter profit on fewer orders for mobile-phone chips. Its forecast missed estimates, sending the shares 6.1% lower.

- American Express Co.(AXP), the biggest U.S. credit-card company by purchases, rose 9 percent in late trading after beating some analysts' estimates for third-quarter earnings.

- BNP Paribas SA, Societe Generale SA and four other French banks will get 10.5 billion euros ($14 billion) from the government, tapping for the first time the 360 billion-euro state rescue package unveiled this month.

- The cost of protecting investors in Japanese and Australian corporate bonds from default declined, according to traders of credit-default swaps. The Markit iTraxx Japan index fell 6 basis points to 201 at 9:14 a.m. in Tokyo, according to prices from Morgan Stanley. The Markit iTraxx Australia index fell 22.5 basis points to 222.5 in Sydney, Citigroup Inc. data show.

Wall Street Journal:
- Google Inc. (GOOG) Chief Executive Eric Schmidt said Monday that the Web search giant "is not completely immune" to the U.S. economic downturn, but he said the shift in advertising towards cheaper, online methods like Google's search business should intensify during hard times.

- Pimco Backs Up the Truck for MBS. High-quality mortgage-backed securities are the investment of choice for bond fund giant Pacific Investment Management Co., in a way they haven’t been for more than eight years. Pimco’s Total Return Fund, the world’s largest bond fund, raised its holdings of mortgage-backed securities to 79% by the end of September, a level not seen since at least June 2000, from 69% a month earlier, according to data from the company’s Web site.

CNBC.com:

- Warren Buffett’s high-profile call to buy US stocks may have its skeptics, but the often-pessimistic Doug Kass isn’t among them. Kass sees more evidence that an upturn is coming in the lukewarm response to Buffett’s call to action. "I would also observe that the widespread dismissal of the Oracle's positive remarks by so many (including the typically permabullish media) is classic evidence of an inflating negativity bubble, which leads me to believe that an advance might be closer at hand."

MarketWatch.com:
- Citadel Investment Group is developing a series of new hedge funds in a move away from its traditional focus on managing one, large so-called multi-strategy fund, a person familiar with the situation said on Monday.

- Under their new government-appointed chief executives, Fannie Mae and Freddie Mac are focused on reducing foreclosures, improving liquidity in the mortgage market and restructuring aspects of their business, according to a panel discussion of the executives and their government regulator at the Mortgage Bankers Association annual conference here Monday.

NY Times:
- The prime brokerage landscape seems to be changing amid the shake-up on Wall Street, according to Investment Dealers’ Digest. Two major prime brokers — Bear Stearns and Lehman Brothers — are gone, while two more — Morgan Stanley and Goldman Sachs — have had hundreds of clients pull their money out of their prime brokerage units. The result has been a boom for rivals like Deutsche Bank and Credit Suisse, as well as independent prime brokers, which have all fought for years to lure prime brokerage clients away from their big rivals.

- 3 Oil Countries Face a Reckoning. As the price of oil roared to ever higher levels in recent years, the leaders of Venezuela, Iran and Russia muscled their way onto the world stage, using checkbook diplomacy and, on occasion, intimidation. Now, plummeting oil prices are raising questions about whether the countries can sustain their spending — and their bids to challenge United States hegemony. For all three nations, oil money was a means to an ideological end.

- In a step that could accelerate a shakeout of the nation’s banks, the Treasury Department hopes to spur a new round of mergers by steering some of the money in its $250 billion rescue package to banks that are willing to buy weaker rivals, according to government officials.

CBS News:

- John McCain ratcheted up his attacks on Barack Obama’s foreign policy credentials by using his running mate’s words against him. “If Sen. Obama is elected, Sen. Biden said, we will have an international crisis to test America's new president. We don't want a president who invites testing from the world at a time when our economy is in crisis and Americans are already fighting in two wars,” McCain said, referring to Biden’s remarks at a fundraiser where he said “we're going to have an international crisis, a generated crisis, to test the mettle of this guy."

Forbes.com:
- Negotiations to end a 45-day machinists union strike against the Boeing Co.(BA) will resume Thursday with a federal mediator in Washington, D.C. Boeing's commercial aircraft assembly plants have been shut down throughout the strike, costing the company an estimated $100 million or more a day in deferred revenue - $4.5 billion or more as of Monday.

Lloyd’s List:

- The relative financial strength of drybulk owners and charterers and the risk of default by one side or the other is one of the real risks of the current financial crisis, according to Daebo Shipping chairman and chief executive Kim Chang-jung. He added that the bulk market was also being affected by what he thought was a collapse in forward freight agreements and other derivatives. “They were played by the US investment banks — Merrill Lynch, Goldman Sachs — who now do not have any money,” Mr Kim said.

Reuters:

- The Conference Board's index of Leading Economic Indicators rose a surprising 0.3 percent in September -- its first increase in five months -- suggesting the economy may be stabilizing, the research group said on Monday."Latest data suggest that conditions in the nonfinancial economy are not falling apart," said the Conference Board's labor economist, Ken Goldstein, in a statement. "Data on hand reflect a contracting economy but not one in free fall."

Financial Times:
- Investors are pumping a record amount of cash into money market funds as they rush to the safest instruments amid the market turmoil. In spite of co-ordinated central bank action to inject liquidity into the markets and sweeping measures from governments to shore up the beleaguered banking sector, investors are still shunning riskier investments. Money market funds, which are considered safe because they tend to buy US Treasuries, absorbed $44.4bn last week, the largest inflow since 2001, according to fund tracker EPFR Global.

- Money market rates fell again on Monday in a sign that the programmes of central bank liquidity are thawing the recent freeze in short-term lending. By a number of measures, conditions across the money markets improved. With the banking system now supported by governments and hefty amounts of short-term central bank funding, traders reported renewed lending in both the money and commercial paper markets.

Late Buy/Sell Recommendations
Citigroup:
- Rated (PG) Overweight, target $82.
- Reiterated Buy on (EQIX), target $112.

Night Trading
Asian Indices are unch. to +2.25% on average.
S&P 500 futures -.69%.
NASDAQ 100 futures -.99%.

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Earnings of Note
Company/EPS Estimate
- (UAUA)/-2.48

- (EAT)/.33

- (SGP)/.31

- (FCX)/1.45

- (SWK)/.97

- (LXK)/.66

- (CSL)/.87

- (DGX)/.82

- (BIIB)/.89

- (RF)/.27

- (BLK)/1.88

- (NCC)/-.37

- (MMM)/1.38

- (LMT)/1.89

- (USB)/.48

- (PFE)/.60

- (COH)/.43

- (OMC)/.68

- (FRX)/.70

- (DD)/.51

- (CAT)/1.41

- (KEY)/.16

- (MAN)/1.42

- (AKS)/1.45

- (BRCM)/.44

- (NSC)/1.20

- (CEC)/.59

- (VMW)/.20

- (AAPL)/1.11

- (QLGC)/.30

- (BSX)/.10

- (PNRA)/.43

- (CERN)/.56

- (RJF)/.51

- (ILMN)/.16

- (YHOO)/.08

- (SY)/.50

Economic Releases
8:30 am EST

- None of note

Upcoming Splits
- None of note

Other Potential Market Movers
- The weekly retail sales reports could also impact trading today.

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

Stocks Finish Sharply Higher, Boosted By Commodity, Transportation, Restaurant, Homebuilding, Construction and Technology Shares

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In Play

Stocks Jumping into Final Hour on Plunging Credit Market Angst, Bargain-Hunting, Less Financial Sector Pessimism and Short-Covering

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Medical longs, Defense longs and Biotech longs. I have not traded today, 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 above-average. Investor anxiety is still very elevated. Today’s overall market action is bullish. The VIX is falling 17.46%, but is still very elevated at 58.01. The ISE Sentiment Index is about average at 160.0 and the total put/call is slightly below average at .84. Finally, the NYSE Arms has been running around average most of the day, hitting 1.22 at its intraday peak, and is currently .86. The Euro Financial Sector Credit Default Swap Index is rising 2.91% today to 99.34 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 falling 4.2% to 193.5 basis points. The TED spread is plunging another 18.6% to 295 basis points. The TED spread is now down 169 basis points in less than two weeks. The 2-year swap spread is falling 9.57% to 111.0 basis points. The Libor-OIS spread is dropping 11.59% to 292 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 7 basis points to 1.13%, which is down 150 basis points in under four months and at the lowest level since April 1999. Another meaningful decline in gauges of credit angst is a large positive for the broad market. Uncertainty regarding the settlement of the now-defaulted Lehman credit derivatives may be holding the market back a bit today. I suspect a lifting of this uncertainty tomorrow will lead to further US stock gains. The US dollar continues to trade very well and I still see further upside in the currency over the intermediate-term. The worst-case scenario for the global economy, that had been factored into many stock prices near current levels, diminishes with each day of improvement in the credit markets, in my opinion. Nikkei futures indicate an +250 open in Japan and DAX futures indicate an +100 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, diminishing credit angst, less financial sector pessimism and bargain-hunting.

Today's Headlines

Bloomberg:
- The cost to protect against defaults by U.S. banks fell today as money-market rates declined in a sign that central bank efforts to unfreeze interbank lending are starting to help. Credit-default swaps on Morgan Stanley, Goldman Sachs Group Inc., Citigroup Inc. and Merrill Lynch & Co. declined, according to CMA Datavision. The amount banks charge each other for three-month loans in U.S. dollars, as measured by the London interbank offered rate, or Libor, dropped the most in nine months, according to the British Bankers' Association. A measure of cash availability, known as the Libor-OIS spread, fell below 300 basis points for the first time in almost two weeks as U.S. and European governments guaranteed bank debt and started other rescue efforts including the purchase of equity stakes in some banks.

- Money-market rates fell, extending last week's declines, as governments bailed out banks and policy makers intensified efforts to combat the freeze in lending with cash injections. The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars slid 36 basis points to 4.06 percent today, the biggest drop in nine months, according to the British Bankers' Association. The overnight- dollar rate declined 16 basis points to 1.51 percent, the lowest level in more than four years. The three-month rate for euros fell. The Libor-OIS spread, a measure of cash availability, dropped below 300 basis points for the first time in almost two weeks.

- The US dollar rose against the euro for a fourth day as Federal Reserve Chairman Ben S. Bernanke endorsed additional fiscal stimulus.

- Ann Kohler, analyst at Caris & Co. says an OPEC production cut may prolong the global economic slump. (video)

- Ray Barros, CEO of Ray Barros Trading Group, says TED spread’s fall may signal stock rally. (video)

- The Bush administration is ``open to the idea'' of another economic stimulus package, though approval would depend on details drafted by Congress, spokeswoman Dana Perino said.

- Federal Reserve Chairman Ben S. Bernanke endorsed additional fiscal stimulus, saying the credit crunch is ``hitting home'' as Americans find it harder to get loans, threatening a prolonged economic slump.

- Crude oil rose for a second day in New York on speculation OPEC will lower output in an attempt to halt a slide in prices, which have fallen more than 50 percent from July's record.

- Exelon Corp., the biggest U.S. operator of nuclear power plants, offered to buy NRG Energy Inc. for $6.2 billion to take advantage of a 55 percent drop in the debt-laden company's shares since July 1.

- Judith Miller, the former New York Times reporter who spent 85 days in jail for refusing to testify in a grand jury investigation, joined News Corp.'s Fox News as a contributor.

Wall Street Journal:

- You would think we would learn. But we don’t. We tirelessly follow Wall Street prophets such as talk-show host Jim Cramer, Internet analyst Mary Meeker and investor Bill Miller. At least until we discover that they, too, get lost in the wilderness. And we learn nothing. The latest of these prophets is Arjun N. Murti, an influential Goldman Sachs oil analyst, who has marched his bullish oil followers straight off a cliff. On May 6, 2008, Murti predicted $150 to $200 oil within six to 24 months. Prices dutifully jumped. Then they rose even higher, peaking at more than $147 on July 11. Later that month, of course, it all came apart. The prospects for strong global economic growth were fading. Speculators and leveraged traders turned tail. Fast. “Super Dips” replaced “Super Spikes.” By mid-September, Murti was in full retreat. He cut his 2009 oil price target to $110 from $140. A week ago, he was back at it. Goldman cut its 2009 oil price target to $75 from $110. Apparently, it might go even lower. Goldman’s “worst case” scenario is $50 a barrel. That is roughly the price at which oil was trading on March 30, 2005, when Murti made his $105 prediction.

NY Times:
- In an unusual partnership, New York State and federal prosecutors are investigating trading in credit-default swaps, the insurance-like securities that have come under close scrutiny for their role in the financial crisis, The New York Times’s Vikas Bajaj reported. Prosecutors are looking at whether traders manipulated the largely unregulated market for credit-default swaps to drive down the price of financial shares over the last year, The Times said, citing people briefed on the investigation.

- Unhappy with both the A.P. service and its price — more than $800,000 a year at a time when The Dispatch’s finances are severely pinched — the paper on Friday took the once-unthinkable step of saying it would drop the service.

NY Post:

- Media mogul Sumner Redstone, caught in the vise-like grip of the credit crunch, may be forced to sell his prized Viacom Inc., home of MTV, Nickelodeon and Paramount Studios. A sale of Viacom, or any piece of the company, would be a tremendous setback to the 85-year-old Redstone, as he has spent the better part of his professional life pulling together the crown jewel of his investment portfolio.

Integrity Research:
- Developing Hedge Fund Trends To Hurt Research Biz. We suspect that many research providers - both sell-side firms and independent research providers - will suffer as the sheer number of current (or potential) clients drops. In our view, the firms that will bear the brunt of the difficulties will be the smaller regional players and the indie shops that produce undifferentiated fundamental company research. This trend will be exacerbated by the fact that the amount of commissions available to pay for third-party research should also plunge.

MDA DataQuick:

- Southern California home sales shot up by an unprecedented 65 percent last month from the dismal, record lows of a year ago, when a credit crunch slammed the brakes on home financing. September sales also posted a rare gain over August as price cuts lured more buyers. Last month's sales were the highest for any month since December 2006 and the year-over-year gain was the highest for any month in DataQuick's statistics, which go back to 1988.

Washington Post:

- Is Capitalism Dead? The market that failed was not exactly free. The 1999 repeal of the Glass-Steagall Act, a Depression-era law separating commercial banking and investment banking, passed with overwhelming bipartisan support in Congress and was signed into law by President Bill Clinton. No subsidy would prove more fateful than the massive federal commitment to residential real estate -- from the mortgage interest tax deduction to Fannie Mae and Freddie Mac to the Federal Reserve's low interest rates under Mr. Greenspan. Unregulated derivatives known as credit-default swaps did accentuate the boom in mortgage-based investments, by allowing investors to transfer risk rather than setting aside cash reserves. But government helped make mortgages a purportedly sure thing in the first place. Home prices seemed to stand on a solid floor built by Washington.

Reuters:
- Nigeria has cut the proposed benchmark oil price in its draft 2009 budget to $45 per barrel from $62.5 as a result of the decline in world crude prices, a senior finance ministry official told Reuters on Monday. "Forty-five dollars is what we are working with right now, but it has to go to the National Assembly (for approval)," the official said, declining to be named.

Deutschlandradio:

- European Central Bank Executive Board member Juergen Stark said inflation will slow more than expected next year as the economy weakens. Stark said that “we have to brace ourselves for a longer phase of difficult economic developments.” While the crisis “may have reached a peak” in the past week, it will take a “long time” for confidence to return to the banking sector.

Al-Jazirah:

- Saudi Arabia’s inflation is easing as global commodity prices decline because of the international financial crisis, citing Hamad Saud al-Sayari, the central bank Governor. Inflation will continue to slow in the coming months as basic commodity prices decline in the kingdom, he said.

Bear Radar

Style Underperformer:
Small-cap Value (-.76%)

Sector Underperformers:
Gaming (-1.93%), Retail (-.81%) and REITs (-.61%)

Stocks Falling on Unusual Volume:
VE, AMAG, XRAY, RIMM, MBR and HRL

Stocks With Unusual Put Option Activity:
1) SNV 2) AMAG 3) JASO 4) KBR 5) BBD