Wednesday Watch

Late-Night Headlines
Bloomberg:
- The cost of protecting Japanese corporate bonds from default declined, according to traders of credit-default swaps. The Markit iTraxx Japan index fell 15 basis points to 205 as of 8:59 a.m. in Tokyo, according to prices from Morgan Stanley.

- Yields on Fannie Mae(FNM), Freddie Mac(FRE) and Ginnie Mae mortgage bonds tumbled to the lowest in almost two weeks relative to US government notes, potentially lowering home-loan rates. The difference between yields on Washington-based Fannie’s current-coupon 30-year fixed-rate mortgage securities and 10-year Treasuries fell about 23 basis points to about 183 basis points as of 3:50 pm in New York.

- Scrap steel buyers in Asia are canceling purchases after prices tumbled more than 80% in the past four months as demand slumps, traders said. “There are buyers in China, India and Europe that are literally fighting for their survival,” said Bob Garino, director of commodities at the Institute of Scrap Recycling Industries Inc., a trade assoc. representing more than 1,600 companies. “Steel prices have fallen off a cliff, and they just don’t have the money to honor their contracts.” Prices fell to $120 a metric ton this month, from $730 a ton in July, said Jeff Allman, managing director of ferrous trading at St. Louis-based Kataman Metals Inc., which does more than $1 billion in scrap trades a year. There may be a global ferrous, or steel-rich, scrap oversupply of more than 5 million tons, he said. Surplus ferrous scrap is sitting in yards, ports and on ships as contracts are renegotiated, said Kataman Metals’ Allman. Profit margins have dropped to at most $20 a ton, from as much as $200 a ton previously, he said.

Wall Street Journal:
- New data from the Depository Trust & Clearing Corp. speak volumes about trading activity in the vast credit-default-swap market. On Tuesday, the DTCC began publishing weekly numbers on its Web site that detail how much of these insurance-like contracts are tied to individual companies and countries. The information -- previously unavailable to the public -- showed that 10 debt issuers most widely referenced by the swaps include Turkey and Russia and Wall Street firms Morgan Stanley(MS) and Goldman Sachs Group Inc.(GS).

- Key battleground wins in Ohio, Pennsylvania and Florida put Sen. Barack Obama over the top in a hard-fought presidential race, eliminating rival Sen. John McCain's path to the White House.

Reuters:

- Democrats appear certain to fall short in Tuesday's elections of obtaining a U.S. Senate majority big enough to clear Republican procedural hurdles that can kill legislation, senior party aides said. The aides said Democrats will likely gain at least six or seven seats, but not the nine needed to hit a "filibuster-proof majority" of 60 in the 100-member chamber.

- The fundamentals of the U.S. stock market have "improved radically" and declines in valuations to five-year lows are overblown, legendary investor and Vanguard Group founder John Bogle said on Tuesday. Bogle's comments, coming as U.S. stocks rose in their biggest Election Day rally, underlines an emerging streak of optimism on Wall Street over corporate earnings and the prospect of more measures to prevent the financial crisis from turning into a global recession. "It seems to me that people have lost sight of the fact that the fundamentals have improved radically," said Bogle. "The value of the U.S. stock market was $18 trillion a year ago. And now it's about $9.5 trillion or let's call it $10 trillion with today's rally. Anyone who believes that American business is worth $8 trillion less than it was a year ago I think is a fool," he told Reuters in a telephone interview.

- U.S. securities regulators will help speed efforts to create a central counterparty for the $55 trillion credit default swap market by temporarily exempting exchanges, dealers and other applicants from lengthy registration requirements, according to a document obtained by Reuters on Tuesday.

- The Treasury Department is exploring how best to expand its capital injection program to provide more liquidity to credit markets and is considering specialty finance firms in the process, a source familiar with the government's thinking said on Tuesday.

- Investment bank UBS(UBS)has slashed its commodities outlook for the second time in just a few weeks, predicting a slowdown in global growth in 2009 will eat deep into industrial raw material demand. The bank cut forecasts for commodity prices in 2009 by an average of 37 percent after its economists trimmed their forecasts for global growth next year to 1.3 percent from an earlier forecast of 2.2 percent. "This has a meaningful impact on commodity markets, pushing surpluses up further and, over the medium term, negating the positive effects of continued poor supply growth," the bank said in a note. "Key benchmark commodities oil and copper are forecast to average $60 a barrel and $1.30/lb ($2,866 a ton) respectively in 2009 and iron ore faces a 40 percent price decline for the next year's contract."

Financial Times:
- The lucrative fees charged by hedge funds will have to fall in the wake of the dire returns posted by the $2,000bn industry this year, according to the industry's own trade body. Alexander Ineichen, a member of the investor steering committee of the Alternative Investment Management Association, said he also feared that 80 per cent of hedge funds with less than $100m under management would fold as a result of the current woes, with 30-40 per cent of mid-sized funds disappearing, although the biggest names could benefit from industry consolidation. Mr Ineichen said the standard "two and 20" model of a 2 per cent flat fee and a 20 per cent performance fee would not survive the bloodletting. The average fund has lost 21.6 per cent over the past 12 months, according to data from Hedge Fund Research.

Financial Times Deutschland:

- European Central Bank Executive Board member Juergen Stark said the bank is ready to fight the deepening financial crisis and its effects on the economy, citing an interview. “We’re ready to use all instruments at our disposal and the main instrument is interest rate policy as long as our mandate” to contain inflation “allows it,” Stark said. The inflation environment “dramatically changed” as “economic dynamics slowed so much that we hardly will see second-round effects in the coming quarters,” he said. Economic growth in the euro region will be “very low well into 2009” and the recovery will be sluggish, Stark said.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (EXPD), target $44.

- Reiterated Buy on (MGA), target $55.

Night Trading
Asian Indices are +1.0% to +4.50% on average.
S&P 500 futures -.11%.
NASDAQ 100 futures +.07%.

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Earnings of Note
Company/EPS Estimate
- (CTSH)/.37

- (PWR)/.28

- (COCO)/.07

- (FWLT)/.90

- (TWX)/.27

- (MHS)/.62

- (MMC)/.32

- (CKP)/.36

- (IACI)/.16

- (GGC)/-.39

- (DUK)/.44

- (RL)/1.25

- (RIG)/3.48

- (NWS/A)/.22

- (CSCO)/.39

- (CCI)/-.05

- (THQI)/-.38

- (AVB)/1.26

- (CNO)/.28

- (FCN)/.61

- (CUZ)/.25

- (VMC)/.84

- (DVN)/3.06

- (XTO)/1.00

- (WFMI)/.13

- (MDR)/.69

- (SLE)/.18

- (BDX)/1.11

Economic Releases
8:15 am EST

- The ADP Employment Change for October is estimated at -100K versus -8K in September.

10:00 am EST

- ISM Non-Manufacturing for October is estimated to fall to 47.0 versus 50.2 in September.

10:35 am EST

- Bloomberg consensus estimates call for a weekly crude oil inventory build of +1,000,000 barrels versus a +493,000 barrel build the prior week. Gasoline supplies are estimated to fall by -650,000 barrels versus a -1,507,000 barrel decline the prior week. Distillate inventories are expected to rise by +1,550,000 barrels a +2,325,000 barrel increase the prior week. Finally, Refinery Utilization is estimated to rise by .2% versus a .59% increase the prior week.

Upcoming Splits
- None of note

Other Potential Market Movers
- The weekly MBA mortgage applications report, Challenger Job Cuts report, (L) investor meeting, (SLE) analyst meeting, (CEPH) analyst day, Goldman Sachs Industrials Conference, Keefe Bruyette Woods Brokerage Conference and Goldman Sachs Software Conference could also impact trading today.

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

Stocks Finish at Session Highs, Boosted by Construction, Commodity, REIT, Homebuilding, Financial, Alternative Energy and Internet Shares

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In Play

Stocks Soaring into Final Hour as Election Uncertainty Winds Down, Credit Angst Improves and Forced Selling Diminishes

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Medical longs, Computer longs, Internet longs, Retail longs and Biotech longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is bullish as the advance/decline line is slightly higher, almost every sector is rising and volume is above average. Investor anxiety is high. Today’s overall market action is bullish. The VIX is falling 8.6% and is very elevated at 49.08. The ISE Sentiment Index is below average at 111.0 and the total put/call is above average at 1.0. Finally, the NYSE Arms has been running below average most of the day, hitting .5 at its intraday trough, and is currently .55. The Euro Financial Sector Credit Default Swap Index is rising .72% today to 93.33 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 7.2% to 186.50 basis points. The TED spread is falling another 7.56% to 224 basis points. The TED spread is now down 240 basis points in about three weeks. The 2-year swap spread is falling 3.81% to 113.75 basis points. The Libor-OIS spread is falling 1.91% to 213 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 5 basis points to .91%, which is down 172 basis points in about four months and at the lowest level since January 1999. The (XLF) continues to trade well and even recent laggard (GS) is joining the party today. There is another massive decline in commercial paper yields today, which is a large positive, as well as the ongoing improvement in many gauges of credit market angst. The pullback in the US dollar likely has a bit further to go. I am seeing some conflicting moves today. The large decline in the 10-year yield is noteworthy and likely election related. An Obama victory and a Democratic filibuster-proof majority in the Senate will likely lead to a mixed-to-lower open in the morning for US stocks, with strength developing in the afternoon. An Obama victory, combined with no filibuster-proof majority for the Dems, would likely produce a strong open for stocks in the morning with gains maintained throughout the day. An unexpected McCain victory tonight would likely produce a massive rally for US stocks. In the event that the outcome of the election is not certain by tomorrow, stocks would likely see meaningful losses. As I said last week, I still expect the DJIA to test 10,000 before week’s end. Nikkei futures indicate an +460 open in Japan and DAX futures indicate an +38 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on short-covering, optimism over an impending end to election uncertainty, less financial sector pessimism, diminishing forced selling, less credit market angst and bargain-hunting.

Today's Headlines

Bloomberg:
- Amgen Inc.(AMGN), with more cash than all but two U.S. pharmaceutical industry rivals, will compete with Pfizer Inc. and other large drugmakers to snatch up distressed biotechnology companies at bargain prices. Amgen, the world's largest biotechnology company, has $9.76 billion in cash and marketable securities, according to Bloomberg data. The company is seeking ``attractive opportunities'' in the ``challenging environment for biotech companies needing to raise cash,'' said David Polk, a spokesman, in a Nov. 3 e-mail. The comments follow similar pledges last month by Pfizer, Bristol-Myers Squibb Co. and Wyeth.

- Treasury Secretary Henry Paulson is considering taking stakes in non-bank financial companies after already allocating $250 billion for government investments in banks, two people briefed on the matter said.

- CSFB cut its oil forecast for 2009 to $60 from $75/bbl.

- A rising threat of inflation earlier this year ``froze in its tracks'' in recent months as the credit crisis worsened, Federal Reserve Bank of Dallas President Richard Fisher said. Plunging commodity prices, including a 55 percent decline in the cost of oil since July, have eased inflation pressures. ``I don't believe we are likely to have sustainable deflationary impulses,'' Fisher told reporters after his speech.

- Contracts on the Markit CDX North America Investment Grade Index of 125 companies in the US and Canada decreased 10 basis points to 188, according to Phoenix Partners Group. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings declined 10 basis points to 135, JPMorgan prices show.

- Surging prices for oil, copper, gold and corn sent commodities rallying as a U.S. Election-Day plunge in the dollar boosted the appeal of raw materials as a hedge against inflation. Speculation that Democratic candidate, Senator Barack Obama, who leads national polls, will win against Republican John McCain helped send the dollar lower and lift commodity and equity markets. ``With the Democrats, there's the assumption of the potential of more inflation, given their spending plans,'' said William O'Neill, a partner at Logic Advisors in Upper Saddle River, New Jersey.

- Chicago is bracing itself for Barack Obama's hometown election-night rally. The event scheduled for Grant Park, known as the city's front yard, may draw as many as 1 million people, Mayor Richard M. Daley said. Officials are hoping for a peaceful gathering, while preparing for possible violence that could further tarnish Chicago, which has the highest murder rate among the country's biggest cities.

- Democrats have been pushing for months a second economic stimulus package worth at least $100 billion. Now that will only be a down payment. Lawmakers are facing growing calls from a measure that would dwarf the $168 billion economic stimulus package signed into law in February and the $175 billion measure Democratic presidential candidate Barack Obama has called for.

- The cost of borrowing dollars for one month in London fell to the lowest level in almost four years as central-bank cash injections and interest-rate cuts worldwide showed signs of thawing the freeze in lending. The London interbank offered rate, or Libor, that banks charge each other for such loans slid 18 basis points to 2.18 percent today, the lowest level since November 2004, and the 17th straight decline, according to British Bankers' Association data. The three-month rate dropped 15 basis points to 2.71 percent, the lowest level since June 9, according to BBA figures.

- Interest rates on U.S. commercial paper fell to the lowest in four years as Federal Reserve efforts to unlock short-term credit markets, including buying the debt directly from companies, showed signs of working. Interest rates on the highest-ranked 30-day commercial paper fell 0.27 percentage point to 1.74 percent, the lowest since Sept. 22, 2004, according to yields offered by companies and compiled by Bloomberg. Yields on 90-day paper fell 0.06 percentage point to a three-month low of 2.62 percent.

Wall Street Journal:

- Republican John McCain and Democrat Barack Obama joined voters eager to cast ballots on Tuesday before making one last pitch for supporters to turn out for their historic presidential contest.

- Big iron-ore miners, in a swift reversal of fortune, are privately bracing for significant price cuts in coming contract negotiations with the world's steelmakers as demand for autos, construction infrastructure and appliances weakens. Although contracts won't be signed until next year, there are indications that steelmakers will be seeking prices 20% to 40% less than this year's levels from BHP Billiton, Rio Tinto and Companhia Vale do Rio Doce, popularly known as Vale. Together, these companies control about 75% of the world's iron-ore production.

- Pain in the market for convertible bonds is crippling big hedge funds and cutting off a key avenue of financing for many companies. This market, which has long welcomed businesses struggling to raise cash, is the latest to suffer from too much borrowing and faulty hedges, which came unwound in the recent turmoil. Overall, the $200 billion convertible-bond market has lost 36% so far this year, a bit more than the stock market, according to Merrill Lynch. But the average convertible-bond hedge fund has lost about 50% in that time, including a 35% plunge in October.

- Intel Corp.'s(INTC) next big shift in chip design is receiving strong early reviews from Web sites that test computer hardware.

- More than three-quarters of the world's largest hedge fund managers have lost money for their investors in the first nine months of the year as crisis deepens in the industry. None of the world's five largest managers' flagship funds has made money for the year to September, according to details supplied by investors. Of the 79 of the world's 100 largest hedge fund managers where Financial News has been able to obtain details, 61 of them, or 77%, have flagship funds that have lost money.

Washington Post.com:

- Study Links Violent Games, Hostility. Research in US, Japan Shows Aggression Increased for Months After Play.

Platts:
- Flight from hedge funds affects gas market, stocks. In the third quarter, investors pulled more than $31 billion from hedge funds, the largest net capital redemption in the industry's history, said Hedge Fund Research, a leading firm specializing in the analyzing hedge fund returns. HFRX Global Hedge Fund Index, which is designed to represent the overall composition of the hedge fund universe, fell 6.9% in September and is off 15.19% year-to-date. Energy-related funds have posted even stiffer losses. The HFRI EH Energy/Basic Materials Index, which represents funds with a primary focus in energy or basic materials, fell 13.21% in September and is down 20.84% year-to-date. Gas market participants also have seen a sell-off from hedge fund traders who have been active in the futures and cash markets over the past few years. While CME Globex electronic trading has made it more difficult to identify who is trading what positions at what size, Ed Kennedy, vice president of energy trading at Hencorp, said the market looks like many of the funds are liquidating their trading positions as investors panic and flee to cash. "Open interest continues to decline," Kennedy said. "People are looking to get out of these hedge funds and mutual funds," Kennedy added. "It's huge what you're seeing here. It's overpowering the scaled-down buying by end-users," he said. Open interest - the number of long or short active positions held - in the prompt-month gas contract has declined about 100,000 since July according to the Commodity Futures Trading Commission's Commitments of Traders reports. During the same period, the prompt month gas futures contract has plummeted about 55% from its July high of $13.577/MMBtu.

Reuters:
- Saudi Arabia has cut supplies to some customers “significantly” after last month’s OPEC meeting. The kingdom may have cut exports since August by as much as 900,000 barrels a day.

- Most Gulf of Mexico oil and gas production that remains shut after Hurricane Ike will be restored by one pipeline repair project expected to finish by March, a U.S. government official said on Tuesday.The repair will bring several deepwater platforms back on line at once, said Lars Herbst, Gulf region director for the U.S. Minerals Management Service."Once that ... pipeline system is repaired, all of that will come back on at one time, and that's at least half if not three-quarters of what's remaining shut in," he said.

Etemaad:
- Iran’s former President Mohammad Khatami criticized the economic policies of his successor, for failing to revive the economy.

Kargozaraan:

- Iran will face ‘big trouble’ if the price of oil falls below $60.60 a barrel for the next five months, citing Ramin Pashaifam, the central bank’s deputy for economic affairs. Pashaifam said that with oil at $60 a barrel, Iran will deplete its oil stabilization fund by the end of the Iranian year on March 20^th.

Bull Radar

Style Outperformer:
Mid-cap Growth (+3.53%)

Sector Outperformers:
Construction (+9.02%), Oil Service (+7.06%) and Telecom (+5.77%)

Stocks Rising on Unusual Volume:
DB, SI, OSIR, MYGN, WPPGY, CSIQ, ENSG, SYKE, FSLR, CRXL, IPCM, HURC, SINT, WMGI, STRA, EXPD, HAYN, JCOM, NCIT, AMSC, CPHD, SWSI, TNH, TGP, WF, CUK, TMB and HIG

Stocks With Unusual Call Option Activity:
1) SOLF 2) KGC 3) CIT 4) MRVL 5) A

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