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

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Medical longs, Computer longs and Internet longs. I added to my (IWM)/(QQQQ) hedges and to my (EEM) short today, thus leaving the Portfolio 50% net long. The tone of the market is very bearish as the advance/decline line is substantially lower, every sector is falling and volume is about average. Investor anxiety is elevated. Today’s overall market action is very bearish. The VIX is rising 7.89% and is very elevated at 66.30. The ISE Sentiment Index is depressed at 59.0 and the total put/call is high at 1.13. Finally, the NYSE Arms has been running very high most of the day, hitting 2.63 at its intraday peak, and is currently 1.60. The Euro Financial Sector Credit Default Swap Index is rising 3.35% today to 109.66 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 up 5.8% to 201.0 basis points. The TED spread is rising 13.2% to 198 basis points. The TED spread is now down 266 basis points in just over four weeks. The 2-year swap spread is falling .12% to 104.63 basis points. The Libor-OIS spread is falling 3.42% to 164 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down 6 basis points to .89%, which is down 173 basis points in just over four months and at the lowest level since January 1999. I am seeing panicky type action again in a number of stocks. Action in the financial sector is a large negative. Tomorrow’s grilling of hedge fund managers will dominate the airwaves and likely be another negative for sentiment in the very near-term. I plan to maintain my current positions into the close with an eye towards lifting some hedges tomorrow. Nikkei futures indicate a -480 open in Japan and DAX futures indicate a -1 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on global growth concerns, forced selling, more shorting and financial sector pessimism.

Today's Headlines

Bloomberg:
- The cost of shipping Middle East oil to Asia, the world’s busiest route for supertankers, may drop because of slowing demand. Refineries hired 84 very large crude carriers, or VLCCs, to load in November, according to a report today from Paris-based shipbroker Barry Rogliano Salles. They had booked 101 for October loadings by this time last month and the average so far this year has been more than 104 a month.

- The cost of protecting against a default by Russia soared after the central bank increased the ruble's trading band and lifted its benchmark interest rate to stem record capital outflows. Credit-default swaps on Russian government bonds jumped to 7.82 percent of the amount insured from 6.14 percent yesterday, according to CMA Datavision prices. The yield on its 30-year dollar bonds increased to 10.47 percent from 9.1 percent, according to Bloomberg prices. The central bank's widening of its ruble target against a basket of dollars and euros by 1 percent yesterday ``achieved nothing'' and cost almost $7 billion of the nation's foreign- currency reserves, according to analysts at Renaissance Capital. Russia joins Hungary, Iceland and Pakistan among a handful of central banks raising interest rates to stem currency losses, as the rest of the world cuts the benchmarks to spur lending.

- The cost of hedging against losses on debt sold by Dubai and Abu Dhabi rose on investor concern a worsening real estate market and plunging stock values will make it more expensive for the Gulf emirates to borrow. Credit-default swaps linked to Dubai jumped 100 basis points to 700, according to Standard Chartered Plc, and Abu Dhabi climbed 45 to 230 basis points, CMA Datavision prices show. The prospect of a collapse in Dubai’s real estate market prompted a pledge of support yesterday from Abu Dhabi Commercial Bank Chief Executive Officer Eirvin Knox. Dubai may need help to finance a surge in borrowing that paid for the world’s tallest tower, palm tree-shaped man-made islands and stakes in banks worldwide, Moody’s Investors Service said.

- Secret stashes of aluminum hoarded by speculators and smelters may cripple the chance of a recovery in prices for producers such as Rio Tinto Group and United Co. Rusal for another year, according to Tiberius Asset Management AG. “We have been taken by surprise by the size of surpluses,” Tiberius analyst Thomas Benedix wrote yesterday. “We now suspect that aluminum is a metal which producers and speculators were hoarding in exceptionally large, ‘hidden’ inventories, which are now finding their way back onto the major exchanges.” Tiberius manages about $1 billion in commodity investments.

- Crude oil fell to the lowest since March 2007 on speculation that the International Energy Agency will cut its global demand estimate tomorrow and the U.S. will report that stockpiles gained.

- President-elect Barack Obama will act quickly on climate change upon taking office in January, his environment adviser said, and may also continue with some of the policies initiated by his predecessor, George W. Bush.

- U.S. Treasury Secretary Henry Paulson plans to use the second half of the $700 billion financial rescue program to help relieve pressures on consumer credit, scrapping an effort to buy devalued mortgage assets.

Wall Street Journal:

- US Bancorp(USB), Buoyed By Federal Cash, Thinks Expansion.

NY Times:
- Oklahoma to Debut New Ambulance Siren You Can Feel.

CNNMoney.com:

- Ospraie in a corner. Dwight Anderson built a $9 billion hedge fund empire betting on volatile commodities markets. His world came undone this summer.

The Industry Standard:

- New Regulations Will Soon Swell IT Workloads.

Business Week:

- HedgeFund.net released its Q3 2008 hedge fund asset flow estimates and preliminary October hedge fund performance estimates. HFN estimates total assets in single manager funds fell 16% in Q3 2008 to $2.497 trillion. Performance losses during Q3 accounted for $347.5 billion of the reduction and investor redemptions and liquidations accounted for an additional $128 billion outflow. Investor redemptions alone accounted for an estimated $117.3 billion outflow, by far the largest on record.

ESPN.com

- One person who won't be swayed by President-elect Barack Obama's recent call for an eight-team national college football playoff is Oregon president David Frohnmayer, chair of the BCS Presidential Oversight Committee.

Press TV:

- Iran’s Parliament agreed that next year’s budget should be based on an oil price of $40 to $50 a barrel, citing an official from the Parliament Energy Commission.

Charlotteobserver.com:

- Some of the nation's biggest banks including Wells Fargo & Co.(WFC) are in for a windfall – on top of the $700 billion government bailout – thanks to a new tax policy quietly issued by the Treasury Department. The notice gives big tax breaks to companies that acquire struggling banks hit hard by the mortgage crisis. In some cases, the breaks could exceed the cost of acquiring the banks, according to private tax experts.

Bull Radar

Style Outperformer:
Large-cap Growth (-2.40%)

Sector Outperformers:
Hospitals (-1.0%), Biotech (-2.27%) and Software (-2.36%)

Stocks Rising on Unusual Volume:
ME, CNQR, MELI, HOLX, IPCC, SMG, SHI, NAT and HTX

Stocks With Unusual Call Option Activity:
1) LGF 2) EK 3) UTHR 4) BP 5) AFL

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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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Earnings of Note
Company/EPS Estimate
- (M)/-.19

- (GMCR)/.21

- (CSC)/.75

- (NTAP)/.27

- (APEI)/.18

- (AMAT)/.15

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- None of note

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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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