Stocks Sharply Lower into Final Hour on Financial Sector Pessimism and Global Deflation

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Internet longs and Medical longs. I added to my (IWM)/(QQQQ) hedges and to my (EEM) short this morning, 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 declining and volume is about average. Investor anxiety is extraordinarily high. Today’s overall market action is very bearish. The VIX is rising 8.1% and is historically elevated at 73.20. The ISE Sentiment Index is very low at 73.0 and the total put/call is very high at 1.35. Finally, the NYSE Arms has been running very high most of the day, hitting 3.0 at its intraday peak, and is currently 1.78. The Euro Financial Sector Credit Default Swap Index is up 6.46% today to 123.0 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 8.78% to 237.08 basis points. The TED spread is rising .27% to 211 basis points. The TED spread is now down 253 basis points in about five weeks. The 2-year swap spread is down .71% to 104.50 basis points. The Libor-OIS spread is falling 2.47% to 171 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is plunging 19 basis points to .36%, which is down 226 basis points in under five months and at the lowest level since Bloomberg record-keeping began in August 1998. The 10-year TIPS spread bottomed at .65% in October 1998 during the Asian financial crisis and at 1.24% in October 2001 during the technology bubble-bursting meltdown. The (XLF) trades terribly today and a positive catalyst must materialize very soon to prevent a meaningful break of the broad market lows. Credit spreads are widening significantly. The 3-month T-Bill is now yielding .06%. The market is starting to price in a sustained bout of deflation. Nikkei futures indicate a -318 open in Japan and DAX futures indicate a -4 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on financial sector pessimism, forced selling, more shorting and global growth worries.

Today's Headlines

Bloomberg:
- Federal Reserve policy makers last month predicted the U.S. economy will contract through the middle of 2009, with some prepared to cut interest rates further in response, according to a record of their meeting. ``Some suggested that additional policy easing could well be appropriate at future meetings,'' the Fed said in minutes of the Oct. 28-29 Federal Open Market Committee gathering released today. ``In any event, the Committee agreed to take whatever steps were necessary to support the recovery.''

- Representative Henry Waxman won the first round of voting in his bid to take the chairmanship of the House Energy and Commerce Committee away from Representative John Dingell. The Democratic Steering Committee voted today 25 to 22 for Waxman over Dingell, said Rosa DeLauro, the chairwoman of the steering committee.

- US fuel demand fell 5.2% in the first 10 months of this year, the biggest drop since 1981, the American Petroleum Institute said. Deliveries of distillate fuel, a category that includes heating oil and diesel, averaged 3.93 million barrels a day during the period, down 6.7%. Jet-fuel consumption average 1.55 million barrels a day, a 4.5% decline. Implied demand for residential fuel averaged 591,000 barrels a day during the 10-month period, down 19% from a year earlier, according to the report. The US produced 4.9 million barrels a day of crude oil through October, down 2.6% from a year earlier. Production for the period was down 49% from the peak of 9.6 million barrels a day in 1970.

Wall Street Journal:

- The exchange-traded-fund industry is stepping up efforts to capture the crown jewel of the mutual-fund business: lucrative 401(k) retirement plans.

NY Times:
- Responding to the economic downturn, Wal-Mart Stores Inc.(WMT) plans to give more than 90 million pounds of fresh food annually to the nation’s largest nonprofit organization addressing hunger, Feeding America.

BBC:

- Opec members have lost about $700bn because of falling crude prices, the oil cartel's president Chakib Khelil said in an interview. Oil prices have fallen 60% from their $147 peak, prompting speculation Opec will cut output again to boost prices. However, speaking to Algerian newspaper El Khabar, Mr Khelil said Opec was unlikely to make a decision this month.

Slate:

- Harvard’s Investment Errors. That’s where America’s greatest university is investing its endowment? The 13-F shows Harvard with some 231 positions worth nearly $2.9 billion, highly concentrated in popped macroeconomic bubble plays. The top 10 holdings, which Bloomberg helpfully breaks out, account for 70 percent of the value of the disclosed holdings. Virtually all of them performed rather poorly in the third quarter, and virtually all of them have slid in the weeks since Sept. 30. The biggest position disclosed—all amounts and dollar values are as of Sept. 30—was $463 million in the iShares MSCI Emerging Market fund. As the six-month chart shows, that fund's off nearly 60 percent from this summer and down by about one-third from the end of September. The top 10 included $232 million in the iShares MSCI Brazil Index Fund, off about 40 percent since the end of September; about $51 million in the iPATH MSCI India Index, off about one-third since the end of September; and $158 million in the iShares FTSE/Xinhua China Index, off about 30 percent since the end of September. For good measure, top 10 holdings also included index funds that were plays on South Africa's commodity-based economy and on the perennially emerging market of Mexico. Even the best, most experienced, and highly regarded long-term investors can get suckered into new-era thinking and make investments that turn out to be highly risky bets. The 13-F shows that the managers running this Harvard portfolio were huge believers in the decoupling theory—i.e., that emerging markets would continue to thrive even as the United States stalled—and in the notion that commodities would keep booming.

Reuters:
- Nigerian Oil Minister Odein Ajumogobia said on Wednesday that Nigeria was not pushing for a further OPEC production cut but that a meeting in Cairo this month would consider all options to address falling prices. "We are in the process of sending our budget to the national assembly based on an (oil) benchmark of $45 ... If you cut the volume then it is going to affect your budget, so obviously we are not advocating for a cut because it is not in our interest," Ajumogobia told Reuters in the capital Abuja.

Interfax:

- Russia’s inflation rate in the year through Nov. 17 reached 12%, citing a government official. The rate is higher than it was in the same period last year, when inflation reached 10%.

CNBC TV-18:
- Steel Authority of India Ltd. has cut prices by as much as 40% from peak levels, citing Chairman S.K. Roongta. The company has cut prices by as much as 20% this month.

Bear Radar

Style Underperformer:
Small-cap Value (-5.37%)

Sector Underperformers:
Coal (-9.40%), Airlines (-8.42%) and I-Banks (-8.40%)

Stocks Falling on Unusual Volume:
LUK, BAC, NUVA, CSGP, NCTY, BIDU, FSLR, FWLT, CTRP, EQIX, GCO, CV, ACE, ARB, NHI, JBX, OPY and SOR

Stocks With Unusual Put Option Activity:
1) BBY 2) SYK 3) SLM 4) ACE 5) LNC

Bull Radar

Style Outperformer:
Large-cap Growth (-1.10%)

Sector Outperformers:
Restaurants (+.28%), Software (-.50%) and Biotech (-1.24%)

Stocks Rising on Unusual Volume:
BT, COGT, NCIT, OSIP, DECK, SAFM, CEPH, CA, WCRX, TEVA, RIMM, XPH, NOK, PVH, AWH and SCL

Stocks With Unusual Call Option Activity:
1) MAT 2) BBY 3) WYE 4) ACE 5) CREE

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Wednesday Watch

Late-Night Headlines
Bloomberg:
- Byron Wien, the chief investment strategist at Pequot Capital Management Inc., said the S&P 500 Index will advance to 1,200 during the first half of next year after the government’s rescue stabilizes the economy. The benchmark index for US stocks must surge 41% from yesterday’s close of 850.75 to reach that level.

- President-elect Barack Obama has selected Washington lawyer Eric Holder to be the next U.S. attorney general, Newsweek magazine reported. Holder overcame initial reluctance to accept the nomination because of the possibility that Senate confirmation hearings would revive questions about why he didn't protest plans by President Bill Clinton to pardon fugitive financier Marc Rich before Clinton left office, Newsweek said. In 2001, Holder was questioned by a House committee that investigated the pardon.

- Automakers in China are seeking government aid and lower sales taxes to help revive waning demand in the world's second-largest vehicle market. ``The situation is really severe,'' said Zeng Qinghong, general manager of Guangzhou Automobile Group Co., a partner of Toyota Motor Corp. and Honda Motor Co., in an interview at the Guangzhou auto show yesterday.

- Senator Edward Kennedy named fellow Democrat Hillary Clinton to lead a working group on insurance coverage in the effort to write health-care legislation.

Wall Street Journal:
- President-elect Barack Obama's incoming White House chief of staff challenged chief executives and other business leaders Tuesday night to join the new administration in a push for universal health care, saying incremental increases in coverage won't be acceptable. "When it gets rough out there, a lot of business leaders get out of the car and say, 'We're OK with minor reform.' I'm challenging you today, we're going to have to do big, serious things," Mr. Emanuel said, speaking to The Wall Street Journal's CEO Council, a conference convened to elicit corporate opinion on the challenges facing the new president.

- Big Three Plead for Aid. GM, Ford, Chrysler Warn of Failure; Congress Wary of Rescue.

NY Times:
- Bankers in Asia had been largely immune to the fallout from the global financial crisis. But as the economic malaise consumes country after country, those jobs are no longer viewed as safe.

CNNMoney.com:
- A collapsed hedge fund’s overlooked wind wager. Tontine Associates, the once gilt-edged hedge fund that collapsed rapidly over the past two months in the wake of the market's carnage, was renowned for its massive and highly contrarian bets in industries like home-building and steel manufacturing.

- Some 76 percent of consumers watch video on their PC, says a new international study from IBM (IBM). That’s up 27 percent from last year, according to IBM’s second-annual survey of consumers in Australia, Germany, India, Japan, the UK and the U.S.

- Gasoline prices declined to their lowest level in more than 21 months Tuesday, falling for the 62nd straight day in a national survey.

Reuters:

- Mexican retail and media tycoon Ricardo Salinas Pliego owns 28 percent of Circuit City and could buy more of the troubled U.S. electronics chain, a Salinas spokesman said on Tuesday.

- As many hedge funds suffer big losses and anxious investors yank out their money, the town synonymous with the riches of their recent glory is now hurting. In Greenwich, Connecticut, the luxury car dealers are quiet, the prices of mansions are declining and the retailers who have made a good living serving its wealthy residents are complaining about a sudden drop in business.

Financial Times:
- Citigroup (C) is liquidating its Corporate Special Opportunities hedge fund after it lost 53 per cent of its value last month, marking the ninth time in recent months that the bank has had to close or rescue a fund in its alternative investment unit. CSO, which managed almost $4.2bn at its peak, has a net asset value of about $58m and debt of about $880m, investors say. People familiar with the matter say investors in the fund are likely to receive no more than 10 cents on the dollar.

- A recent meeting of the national oil companies in Beijing predicted oil prices would fall to about $40 a barrel, Fu Chengyu, chief executive of China National Offshore Oil Corporation, told a conference in Barcelona. "The consensus at the time was that everybody realized the oil price would be even lower," Mr Fu told the Global China Business meeting. "Nobody knew where it would go but most of them said around $40."

- US regulators are moving to approve centralized clearing houses for credit derivatives in a matter of weeks as the debate about the oversight of the vast unregulated sector gathers pace. Groups competing to set up a central counterparty for credit default swaps, the most popular type of credit ­derivatives, are awaiting approval from the Federal Reserve, the Securities and Exchange Commission or the Commodity Futures Trading Commission, which are currently conducting detailed risk reviews of candidates on site.

Latin American Herald Tribune:

- General Motors(GM) to Invest $1 Billion in Brazil Operations – Money to Come from US Rescue Program.

Xinhua News:

- China's police departments should further standardize the procedure of law enforcement and build harmonious relations with the people, China's top police official said on Tuesday. State Councilor Meng Jianzhu, also Minister of Public Security, said at a tele-conference with local public security heads that the police should "be fully aware of the challenge brought by the global financial crisis and try their best to maintain social stability." "In handling mass incidents, we must be clear that the chief tasks of the public security authorities are to maintain order on the scene, ease conflicts, avoid excessive steps and prevent the situation getting out of control," he wrote.

- Beijing Capital International Airport’s combined passenger and cargo traffic fell about 5% in the first half of the month from a year earlier, citing Dong Zhiyi, president of airport operator Beijing Capital International Airport Co.

South China Morning Post:

- Hong Kong office rents may slump as much as 60% in the next two years as the global financial crisis continues to hurt the city’s economy, citing property analysts. CLSA Ltd. revised its forecast to a 60% decline in rents in the city’s Central business district in the next two years from 38% previously. UBS AG forecast a 25% drop by September next year compared with an earlier estimate of 5%, which Credit Suisse Group AG revised its forecast to a 35% decline in 2009 from 15% before. Separately, retail rents in Macau may drop around 30% in the next year on the global slowdown and falling tourist numbers, citing property agents and retailers.

China Securities Journal:

- China’s economy may grow by less than 9% in the fourth quarter of this year as overseas demand weakens, citing People’s Bank of China adviser Fan Gang. The Asian nation’s economic expansion may slip to below 8% next year before rebounding in 2010, citing Fan’s interview.

Late Buy/Sell Recommendations
- None of note

Night Trading
Asian Indices are -1.75% to +.25% on average.
S&P 500 futures -.93%.
NASDAQ 100 futures -1.17%.

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Earnings of Note
Company/EPS Estimate
- (BJ)/.47

- (ROST)/.43

- (DBRN)/.27

- (PETM)/.26

- (GYMB)/1.03

- (INTU)/-.12

- (LDG)/.63

- (LTD)/.00

Economic Releases
8:30 am EST

- The Consumer Price Index for October is estimated to fall .8% versus unch. in September.

- The CPI Ex Food & Energy for October is estimated to rise .1% versus a .1% gain in September.

- Housing Starts for October are estimated to fall to 780K versus 817K in September.

- Building Permits for October are estimated to fall to 774K versus 805K in September.

10:35 am EST

- Bloomberg consensus estimates call for a weekly crude oil inventory build of +1,000,000 barrels versus a +22K increase the prior week. Gasoline supplies are expected unch. versus a 1,982,000 barrel increase the prior week. Distillate inventories are estimated to rise by +700,000 barrels versus a +516,000 barrel increase the prior week. Finally, Refinery Utilization is estimated unch. versus a -.69% decline the prior week.

2:00 pm EST

- Minutes of Oct. 28-29 FOMC Meeting

Upcoming Splits
- None of note

Other Potential Market Movers
- The weekly MBA mortgage applications report, (ALGT) Investor Day, (SMOD) Analyst Meeting, (CKP) Investor Day, (HAL) Analyst Meeting, (TKLC) Investor Day, (BBX) Investor Meeting, (GWW) Analyst Meeting, (ROK) Investor Meeting, Cowen Healthcare Conference, Bank of America Credit Conference, CSFB Aerospace & Defense Conference, Lazard Healthcare Conference and Morgan Stanley Retail Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly 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 modestly higher. The Portfolio is 75% net long heading into the day.