Wednesday Watch

Late-Night Headlines
Bloomberg:
- AIG, Financials Have Biggest Short-Selling Increase at NYSE. American International Group Inc.(AIG), the insurer bailed out by the government, had the biggest jump in shares sold short among NYSE companies in the second half of October. AIG short-selling increased by 42 million shares, or 45%, to 135.7 million shares from Oct. 16 through Oct. 31 compared with two weeks earlier, according to Bloomberg. Short-selling of Citigroup Inc.(C) rose 21.3 million shares, the second biggest increase among NYSE companies. Morgan Stanley(MS), the US investment bank that converted to a bank holding company in September, had borrowed shares increase the third most, by 20.2 million shares. Borrowing of Wells Fargo(WFC) rose by 19.3 million shares, the fourth-largest increase.

- Stephen Schork, president of the Schork Report, says crude oil may fall below $50 a barrel. (video)

- China, the world’s largest iron-ore consumer, probably won’t increase imports next year, the first time they haven’t risen in at least eleven years because of slowing demand from steel mills, an industry group said. The demand slump will show up in import figures in the next two months. Imports dropped 22% in October to 30.6 million tons from the previous month, China’s Customs General Administration said Nov. 11.

- BlackRock Inc.(BLK) Chief Executive Officer Laurence Fink said he's seeing signs of ``capitulation'' in financial markets, a broad selloff that usually precedes the end of a bear market. ``A year ago, I said we won't see a bottom until we see a capitulation,'' he said at an investment conference in New York today. ``We are seeing a capitulation,'' and financial markets may begin to recover by mid-2009, said Fink, 56, whose company is the largest publicly traded asset manager in the U.S.

- Google Inc.(GOOG), the most popular Internet search engine, is adding videoconferencing features to its Gmail e-mail service to lure users from Yahoo! Inc. and Microsoft Corp. Users can chat for free using Gmail by installing a small add-on program to their browser, Google said today in a statement. Those without a Webcam can use an audio chat option.

- Goldman Sachs Group Inc.(GS), which converted into a bank holding company in September, doesn't expect the financial crisis to change the firm's strategy, Chief Executive Officer Lloyd Blankfein said.

- Money-market rates extended declines as central banks injected cash into the financial system to counter a collapse in lending. The rate New Zealand banks charge each other for three- month loans fell 20 basis points, the most in three weeks, to 6.39 percent as of the 10:42 a.m. fixing in Wellington, as the country's central bank pumped NZ$500 million ($285 million) into money markets in the first of a new weekly term auction facility. The comparable rate Australian banks charge each other for three-month loans fell 8 basis points to 4.84 percent.

Wall Street Journal:
- After years of small-scale experiments in using so-called emissions trading to reduce pollution, China is taking steps to set up a nationwide system. In recent months, three cities -- Shanghai, Beijing and Tianjin -- have begun creating emissions exchanges modeled after a system pioneered in the U.S. to reduce emissions that caused acid rain. Known as cap-and-trade, this system sets an overall limit, or cap, on how much an industry can pollute.

- AIG’s(AIG) Revamped Rescue to Benefit Goldman Sachs(GS), Banks.

- Apple Inc.'s(AAPL) iPhone has shaken up the cellphone business. Its next target: Nintendo Co. and Sony Corp. The iPhone and its sister device the iPod touch, which feature big screens and powerful graphics, are emerging as serious competitors to Nintendo's DS handheld and Sony's PlayStation Portable.

- While China is making a big bet that infrastructure spending will prop up its economy, India is finding it hard to follow suit: The global economic slowdown could sink its ambitious plans, and some current projects are struggling. The credit crisis is delaying building by crimping the flow of cash for roads, ports and power plants. Billions of dollars in infrastructure projects could be in jeopardy, builders say, threatening one of the world's largest programs. Interest rates on project financing have soared, banks are reluctant to lend, and investors are sitting on their cash.

MarketWatch.com:
- British Prime Minister Gordon Brown on Tuesday urged a worldwide round of tax cuts in order to stave off a deep global recession. "This is a chance for the world to work together so that a fiscal stimulus in one country can benefit from fiscal stimuluses that are taking place in other countries as well," Brown said during a news conference.

CNBC.com:
- Tontine Partners, one of the largest and most successful hedge fund families, is now liquidating two of its major funds, Tontine Capital and Tontine Partners, CNBC has learned.

- The push for an auto industry bailout gained momentum as House Speaker Nancy Pelosi said she would bring the House back in session next week to approve "emergency and limited financial assistance" for the battered industry.

CNNMoney.com:
- As soaring oil prices enriched the Persian Gulf region in recent years, the United Arab Emirate of Dubai became the embodiment of global exuberance. Now even this boomtown has fallen prey to the credit crisis.

- The head of the federal agency that oversees commodities trading wants to replace it and the Securities and Exchange Commission with three new regulators to better deal with an increasingly complex financial system.

USA Today.com:

- The nationwide average price of a gallon of regular gasoline slipped another 2 cents Tuesday to $2.22 a gallon, AAA says. Gas prices have tumbled 46% since peaking at $4.11 in July. In Kansas City, Mo., average prices were $1.80 a gallon.

Reuters:

- General Motors Corp's (GM) extremely distressed debt is an attractive investment as the automaker has several options to improve its liquidity and survive the economic downturn, according to credit analysts at JPMorgan.

- The regulator for the two largest U.S. mortgage finance companies on Tuesday unveiled a plan that could cut payments for hundreds of thousands of struggling homeowners to help reverse a wave of defaults threatening to swamp the economy.

Financial Times:
- Hedge fund managers who earned more than $1bn last year, including George Soros and Philip Falcone, are being summoned to Capitol Hill on Thursday to testify under oath about the potential risks their firms pose to the broader economy. The hearing before the House oversight committee, headed by Democrat Henry Waxman, marks one of the few instances in which the largely unregulated hedge fund industry will be subject to a barrage of questions by lawmakers. Mr Soros, an important donor to Democratic causes, and Mr Falcone will appear alongside John Paulson of Paulson & Co, James Simons of Renaissance Technologies and Kenneth Griffin of Citadel Investment Group. Hedge funds have been blamed for short selling the stocks of troubled financial firms and thus deepening their woes. The liberal Democrat challenged his colleague, John Dingell of Michigan, for the chairmanship of the House energy committee, a move that riled the Democratic ranks and created an uncomfortable fissure just one day after the Democratic presidential and congressional victories in last week's election.

- Toscafund Asset Management issued an unusually impassioned plea to its investors to stick with its core hedge fund after a 20 per cent drop in performance during October pushed its fall so far this year to 66 per cent. Martin Hughes, the former star banks analyst who founded the hedge fund eight years ago, suggested in a monthly review that its Tosca portfolio had been the victim of a campaign by other market participants to drive down the value of its holdings.

- Russia's central bank signaled on Tuesday it was prepared to allow a sharp depreciation of the rouble as it lowered the floor at which it would defend the struggling currency, while capital outflows from the country took their toll on foreign exchange reserves. The central bank faces the danger that, by signaling a devaluation may be on the cards, it may spark a run on the rouble.

- General Motors(GM) plans to suspend production at its factories in South Korea for about two weeks starting next month in one of the strongest signs yet that the crisis in carmaking has spread to Asia. The shutdown will take effect from late December and affect all five of GM's Korean plants formerly owned by Daewoo, which form one of the lossmaking US carmaker's best-performing business units. "The economic crisis is truly global," Jay Cooney, GM Daewoo's vice-president, said. "What we're beginning to see here in Asia is no different from what is going on in Europe and what has already happened in the US."

The Standard:

- Hong Kong investors were “robbed” by foreign funds and speculators who drove the city’s benchmark stock index down by betting on further declines, billionaire Joseph Lau said. Foreign institutions have “hoodwinked Hong Kong investors” and the city government should have followed other countries in banning short-selling, Lau, chairman of developer Chinese Estates Holdings Ltd., said. Speculators will return to attack the city’s stocks again and investors should remain “very cautious,” Lau said.

Apple Daily:

- China is highly likely to suffer from deflation rather than inflation, citing Zhang Jianping, a director at the National Development and Reform Commission’s research department. The agency is China’s top planning body.

Late Buy/Sell Recommendations
Citigroup:

- Added (PLCE) to Top Picks Live list, target $34.

Night Trading
Asian Indices are -2.0% to -1.0% on average.
S&P 500 futures +.80%.
NASDAQ 100 futures +.70%.

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Company/EPS Estimate
- (M)/-.19

- (GMCR)/.21

- (CSC)/.75

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- (APEI)/.18

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Economic Releases
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- None of note

Other Potential Market Movers
- The weekly MBA Mortgage Applications report, (AVCT) Analyst Day, (ACN) Analyst Conference, (STR) Analyst Meeting, (RFMD) Analyst Meeting, (CMI) Analyst Day, (HAS) Analyst Meeting, (BBX) Investor Luncheon, (NKTR) Analyst Meeting, Merrill Banking/Financial Services Conference, UBS Building Conference, Rodman & Renshaw Investment Conference, Robert W. Baird Industrial Conference, CSFB Healthcare Conference and Merrill Defense Forum could also impact trading today.

BOTTOM LINE: Asian indices are lower, weighed down by commodity and financial stocks in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing higher. The Portfolio is 75% net long heading into the day.

Stocks Finish Lower, Weighed Down by Commodity, Construction and Gaming Shares

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In Play

Stocks Lower into Final Hour on Global Growth Worries, Financial Sector Pessimism and More Forced Selling

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Medical longs and Internet longs. I covered all my (IWM)/(QQQQ) hedges and some of my (EEM) short today and then added them back this afternoon, thus leaving the Portfolio 75% net long. The tone of the market is bearish as the advance/decline line is lower, most sectors are falling and volume is about average. Investor anxiety is very high. Today’s overall market action is bearish. The VIX is rising 2.05% and is very elevated at 61.27. The ISE Sentiment Index is low at 107.0 and the total put/call is very high at 1.20. Finally, the NYSE Arms has been running very high most of the day, hitting 2.85 at its intraday peak, and is currently 1.84. The Euro Financial Sector Credit Default Swap Index is rising 1.7% today to 106.66 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 unch. at 186.25 basis points. The TED spread is falling 13.95% to 175 basis points. The TED spread is now down 289 basis points in just over four weeks. The 2-year swap spread is rising 2.07% to 104.75 basis points. The Libor-OIS spread is falling 2.49% to 170 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is unch. at .95%, which is down 167 basis points in about four months and at the lowest level since January 1999. The ongoing improvement in the credit markets and falling energy prices remain large positives, however the continued forced selling by funds is overwhelming any bullish developments right now. I still expect a strong rally to materialize before week's end. Nikkei futures indicate a -179 open in Japan and DAX futures indicate an +100 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on falling energy prices, improving credit markets, bargain-hunting and short-covering.

Today's Headlines

Bloomberg:
- Luxembourg Prime Minister Jean-Claude Juncker, who leads the group of euro-area finance chiefs, said the risk of inflation in the region has vanished. “I would like to think that we could have another cut in the interest rates,” Juncker said, when asked if the ECB may move as soon as next month. The central bank “isn’t blind” to the financial situation and the economic slowdown and “is drawing the same conclusions from these observations.”

- Blackstone Group LP(BX) Chairman Stephen Schwarzman said a global recession isn’t necessarily bad news for leveraged buyouts. “We’re quite optimistic about our new prospects,” Scharzman said. “We are in extremely strong financial position.” Schwarzman said the biggest profits for private-equity investors come during the worst economic times, pointing to recession in the early 1990s and 2001, when investors earned average annual returns of around 30%.

- The cost of shipping Middle East crude to Asia, the world’s busiest route for supertankers, may drop for a fourth day, amid signs that weakening oil demand and reduced OPEC output are curtailing cargoes. Refineries may hire 100 very large crude carriers, or VLCCs, to collect cargoes from Persian Gulf ports in November, compared with a monthly average of about 105, Charlie Fowle, a director at London-based shipbroker Galbraith’s Ltd., wrote.

- Russia's ruble fell the most in two months and stocks tumbled as the central bank scaled back its defense of the currency amid the country's worst financial crisis since the 1998 devaluation. Bank Rossii widened its target range for the ruble against a basket of dollars and euros by 30 kopeks (1 cent) to increase the currency's ``flexibility,'' according to a statement posted on its Web site after the market closed today. The Micex Index plunged 13 percent, the biggest decline worldwide today, and won't open tomorrow, spokeswoman Anna Cheryomushkina said.

- Copper, after a 42% slump this year, is still high enough for three-quarters of mining capacity to avoid losing money, making closures that would boost prices less likely, Goldman Sachs said. New mining projects and expansions by companies including Anglo American Plc and Xstrata Plc are unlikely to be constrained either, Goldman said.

- Former Sumitomo Corp. copper trader Tetsu Emori, who now runs the Astmax Commodity Global Macro Fund for Japan’s biggest commodity manager, says crude oil may fall below $50/bbl. (video)

- The slump in shipping has at least two more years to go as the global fleet expands and a slowing world economy saps demand for everything from iron ore to consumer goods, the largest shipping hedge fund group said. Rental income from commodity carriers and container ships is unlikely to earn owners much more than running costs for the next two to five years, Tufton Oceanic Ltd. research director Andreas Vergottis said in an interview today. Rates for oil tankers will drop to similar levels ``within three months,'' he said.

- Crude oil fell below $59 a barrel in New York for the first time since March 2007, and gasoline tumbled, on speculation the International Energy Agency will cut its 2009 oil-demand forecast because of slowing economic growth. Pump prices are following futures lower. Regular gasoline, averaged nationwide, declined 2 cents to $2.22 a gallon, AAA, the nation's largest motorist organization, said today on its Web site. The fuel has tumbled 46 percent from the record $4.114 a gallon reached on July 17. ``This is a tough time for OPEC because of the demand picture,'' Mueller said. ``Every time they cut production they are building up spare capacity. There's also a risk that they may make cuts and prices still won't rebound.''

- Money-market rates in London fell as central banks injected cash into the financial system to counter a collapse in lending. The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars slid 6 basis points to 2.18 percent today, the 22nd consecutive decline and the lowest level since Oct. 29, 2004, according to British Bankers' Association data. The comparable euro rate fell 7 basis points to 4.32 percent, the lowest level since Jan. 24.

CNBC.com:
- Goldman Sachs(GS): Has Firm Lost Its Midas Touch?

CNNMoney.com:
- As the lights fade across the hedge fund universe, SAC Capital Advisors had been one of the few funds unbowed by the rout that has forced countless rivals to close or suspend redemptions. But now, some wrong-way bets at SAC - notably on the disastrous Volkswagen-Porsche trade that hammered many hedge funds last month - are forcing fund founder and general partner Steve Cohen to dismiss staff in the wake of double-digit losses. While Cohen has hardly been shy about reducing his exposure to equity markets and "going to cash," SAC - with $16 billion in assets - was still whipsawed in October's ugly markets, booking an 11% loss for the month and 18% for the year to date.

Washington Times:

- A behind-the-scenes battle to take the reins of the Republican National Committee is taking off between former House Speaker Newt Gingrich and former Maryland Lt. Gov. Michael S. Steele.

LA Times:

- Goldman, Sachs & Co.(GS) urged some of its big clients to place investment bets against California bonds this year despite having collected millions of dollars in fees to help the state sell some of those same bonds. The giant investment firm did not inform the office of California Treasurer Bill Lockyer that it was proposing a way for investment clients to profit from California's deepening financial misery. In Sacramento, officials said they were concerned that Goldman's strategy could raise the interest rate the state would have to pay to borrow money, thus harming taxpayers.

Philly.com

- Obama chief of staff-designate Rahm Emanuel, who's been an Illinois congressman, Democratic Party House leader,Wall Street investment banker (Wasserstein Perella), Clinton aide, and director of the failed mortgage-lending giant Freddie Mac, which overdosed on subprime loans and had to be bailed out by the federal government, is also a loyal ally of the troubled, highly-paid hedge fund industry, and has worked to keep taxes on their fat fees low, writes HedgeWeek admiringly. Emanuel "was the top House recipient in the House of Representatives of campaign contributions from hedge funds, private equity firms and the wider securities and investment industry during the 2008 election cycle. He played a part in derailing efforts last year to have carried interest taxed as income rather than capital gains, going so far as to write a memo offering several options on how essentially to preserve the tax advantage. However, he also sponsored a bill that would have prevented hedge fund managers from deferring taxes on offshore compensation. "The appointment of Emanuel suggests that Obama's presumed hostility to the hedge fund industry may have been exaggerated and that the sector will get a fair hearing as the new administration begins the process of reforming US financial sector regulation. At a time when hedge fund managers feel particularly friendless, it cannot hurt to have someone who understands their business in the heart of the White House."

The Institute for Luxury Home Marketing:

- Graphs: ILHM National Luxury Home Market.

paidContent.org:

- This one is a shocker: Vivian Schiller, the longtime head of NYTimes.com’s digital efforts, has left the company, and has joined National Public Radio as its new CEO. She succeeds Dennis Haarsager, who has served as interim CEO since March, after Ken Stern left abruptly after internal discord. Also recently, Kinsey Wilson, the executive editor of USA Today and previously the editor of USAToday.com, left the paper and joined NPR as its digital head. With two digital vets at NPR, its already formidable online presence and reputation should grow, if only they can prevent getting mired in all the politics at the company and its member stations.

Globe and Mail:

- Lawrence Asset Management Inc. has temporarily halted redemption orders in its flagship hedge fund after it plunged 65 per cent for the first 10 months of this year. The firm “believes it is in the best interests of all shareholders to suspend redemptions for 60 days” on the Lawrence Partners Fund, its president Ravi Sood told investors in a letter on Monday. The Lawrence Partners Fund, which invests in smaller-capitalization Canadian stocks and has private equity holdings, saw its stellar track record unravel in September when it took a 48-per-cent haircut.

Interfax:
- OAO VSMPO-Avisma, the world’s biggest titanium producer, said orders may fall as much as 50% if business from Boeing Co.(BA) and Airbus SAS declines.

Eesti Paeevaleht:

- George Soros said the global credit crisis has “apparently” reached its peak and the financial system is already healing itself, citing an interview.

Frankfurter Allgemeine Zeitung:

- Microsoft Corp.’s(MSFT) Xbox game console doubled its market share in many European countries following price cuts, citing Microsoft’s entertainment division President Robbie Bach.

recast to "

The Economic Times:
- India’s largest real estate developer, DLF, has put on hold construction of one of the most high-profile mall projects, ‘Mall of India’, at Gurgaon, as retail rentals fall and cash becomes precious. The proposed venture was set to be the country’s largest mall, with around 4.5-million sqft space.

Xinhua Financial Network:

- China won’t approve a stabilization fund to help boost the nation’s stock market in the near future.

Bear Radar

Style Underperformer:
Mid-cap Growth (-4.13%)

Sector Underperformers:
Coal (-8.48%), Gaming (-7.24%) and Gold (-6.81%)

Stocks Falling on Unusual Volume:
MBT, VIP, TYC, DB, DRYS, VPHM, DISH, CHA, BAP, XES, RBA, CXW, TLP, FUN, MR and VTR

Stocks With Unusual Put Option Activity:
1) LBTYA 2) MBT 3) TSN 4) FMCN 5) SBUX

Bull Radar

Style Outperformer:
Small-cap Value (-1.65%)

Sector Outperformers:
Biotech (-1.0%), Restaurants (1.19%) and Telecom (-1.56%)

Stocks Rising on Unusual Volume:
VOD, ASEI, NAVG, RAVN, BUCY, OSIR, CWT, DCO and TRK

Stocks With Unusual Call Option Activity:
1) UBS 2) KG 3) TMA 4) UTHR 5) PNRA