Stocks Falling into Final Hour on Financial Sector Pessimism, Auto Bailout Worries, Forced Selling and Global Growth Concerns

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Internet longs, Biotech long, Computer longs and Medical longs. I covered some of my (IWM)/(QQQQ) hedges this morning and then added them back, thus leaving the Portfolio 50% net long. The tone of the market is very bearish as the advance/decline line is substantially lower, almost every sector is declining and volume is heavy. Investor anxiety is extraordinarily high. Today’s overall market action is very bearish. The VIX is rising 4.87% and is historically elevated at 77.88. The ISE Sentiment Index is low at 105.0.0 and the total put/call is very high at 1.29. Finally, the NYSE Arms has been running high most of the day, hitting 1.8 at its intraday peak, and is currently .86. The Euro Financial Sector Credit Default Swap Index is rising 2.71% today to 125.41 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 11.4% to 264.20 basis points. The TED spread is rising 1.24% to 214 basis points. The TED spread is now down 250 basis points in about five weeks. The 2-year swap spread is down 3.54% to 102.25 basis points. The Libor-OIS spread is rising .88% to 173 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is plunging 35 basis points to .01%, which is down 261 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 3-month T-Bill is now yielding .01%. The market is continuing to price in a meaningful bout of deflation. Today’s downside move has volume behind it. I am hearing another large hedge fund is blowing out of positions in size today. I am seeing the type of capitulatory type action I would expect to see near another tradable low. This will likely occur by no later than Tues. Nikkei futures indicate a -203 open in Japan and DAX futures indicate a -70 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:
- The cost of protecting corporate bonds from default surged to records around the world as the prospect of U.S. automakers filing for bankruptcy protection fueled concern of more bank losses and a deeper recession.

- Representative Henry Waxman, an advocate for pollution controls, won the chairmanship of the House Energy and Commerce Committee, ousting auto-industry ally John Dingell of Michigan. “The champion of the environment has replaced the champion of the automotive industry,” said Daniel Becker, an environmental lawyer and director of the Safe Climate Campaign. House Democrats voted 137-122 for Waxman in a secret ballot, lawmakers said. The Energy and Commerce Committee has jurisdiction over energy, health care and telecommunications and will have a central role in passing several of Obama’s highest legislative priorities when Congress reconvenes next year.

- Democratic Leaders Balk at Auto Rescue Compromise, Aide Says.

- Democratic congressional leaders said they will delay action at least until next month on a compromise plan to help cash-strapped domestic automakers. “Unless they can show us the plan, we can’t show them the money,” House Speaker Nancy Pelosi said. “They have a bipartisan agreement, but it’s their agreement,” Reid said. Congress is in a stalemate over how to pay for the $25 billion the Big Three automakers are seeking. Republicans and the Bush administration want to use money already approved by Congress that is intended to help carmakers develop fuel-efficient vehicles.

- U.S. Senator Barbara Boxer said today she will introduce President-elect Barack Obama’s 10-year $150 billion plan to curb climate change early in the new Congress next year. There will be two bills, with one seeking to authorize a $150 billion grant program for technologies that promote energy efficiency or harness the wind and sun. The second is a scaled- back version of a climate bill she attempted to pass in the Senate last summer, the California Democrat told reporters at a news conference today in Washington.

- Citigroup Inc.(C), Goldman Sachs Group Inc.(GS) and the biggest U.S. banks tumbled in New York trading on concern the nation's deepening recession will generate more losses and weaken demand for financial services. Citi, which lost a quarter of its market value yesterday, dropped a further 21 percent even after Saudi billionaire Prince Alwaleed bin Talal said he would boost his stake in the New York- based bank. Goldman Sachs Group Inc., once the biggest U.S. securities firm, fell below its initial public offering price of $53, wiping out 10 years of gains.

- Japan is sliding back into deflation as slumping global demand cuts exports, prompting companies to cut jobs and reduce spending, said Kyohei Morita, chief Japan economist at Barclays Capital in Tokyo. ``Japan will go back to deflation'' that plagued the country for 10 years until 2007, Morita said in an interview. ``The global financial crisis is forcing companies to cut jobs and keep a lid on investment.''

- Crude oil fell to the lowest since May 2005 as a recession in the U.S., Europe and Japan cut global energy demand. Oil has dropped nearly $100 from its July record as the world economic crisis reduced global demand growth to its weakest in 23 years. “Oil at $147 was purely a speculative bubble,” Gareth Lewis-Davies, an analyst at Dresdner Kleinwort Group Ltd. in London, said before prices breached $50. “It was cheap money chasing opportunities that were evaporating in other asset classes. What would bring it down further is any indication of demand growth being weaker than already dampened expectations.” Prices may fall as low as $40 a barrel by April, Deutsche Bank AG said in a report yesterday. The Organization of Petroleum Exporting Countries potentially needs to cut production by 2.5 million barrels a day to reduce output in an oversupplied market, the note said. OPEC, supplier of more than 40 percent of the world’s crude, has lost $700 billion in revenue because of falling prices, the British Broadcasting Corp. reported, citing Chakib Khelil, the group’s president.

Wall Street Journal:

- Would Buffett Find Berkshire a Value?

MarketWatch.com:

- Investors withdrew $40 billion from hedge funds in October as the industry suffers record losses, Hedge Fund Research said Thursday. Funds of hedge funds, which allocate money to a range of underlying managers, saw the most redemptions at $22 billion last month, HFR reported.

NY Times:
- As shares of Citigroup(C), Blackstone(BX) and other heavyweights of the finance industry slumped to new lows on Thursday, a prominent law firm passionately repeated its call for the reinstatement of the “uptick rule.”

FINAlternatives:

- Perry Capital’s difficulties mounted in October, as the firm’s flagship shed another 13.6%, leaving it down in excess of 20% for the year. The US$10 billion fund suffered from both the short-selling bans and concurrent deleveraging, according to Financial News. It is down about 21% year-to-date.

AP:

- Despite the bad economy, U.S. Internet advertising revenue rose in the third quarter, according to an analysis released Thursday. The report from the Interactive Advertising Bureau and PricewaterhouseCoopers LLP said that online advertising revenue totaled almost $5.9 billion in the third quarter, up 11 percent from the same period last year. It marked a 2 percent rise from the second quarter.

- With weekly jobless claims benefits at a 16-year high, the White House said Thursday that President George W. Bush would quickly sign legislation pending in Congress to provide further unemployment benefits.

Reuters:
- Citigroup Inc (C), JPMorgan Chase & Co (JPM) and Capital One Financial Corp (COF) are among the final bidders for Chevy Chase Bank, a Bethesda, Maryland, lender, sources familiar with the matter said.

Financial Times:
- Emerging market currencies in Asia came under renewed pressure on Thursday, with the South Korean won and the Indonesian rupiah falling to their lowest levels since the Asian financial crisis of 1998. Analysts said that fears over a sharp slowdown in global growth prompted a renewed downward shift in risk appetite. This drove wary foreign investors into repatriating funds from the region, piling pressure on local currencies.

Financial Times Deutschland:
- General Electric Co.(GE) is talking to sovereign wealth funds in Singapore and China to win them as investors, citing an interview with GE International head Ferdinando Beccalli-Falco. The funds include Temasek and GIC of Singapore as well as CIC Safe of China.

Bear Radar

Style Underperformer:
Mid-cap Growth (-1.39%)

Sector Underperformers:
Oil Service (-9.29%), Coal (-8.43%) and Hospitals (-8.23%)

Stocks Falling on Unusual Volume:
JPM, BAC, AMED, WGOV, PDCO, EQIX, AFAM, PTRY, BUCY, HSIC, ATLS, BBBB, LBTYK, JOYG, CETV, PSYS, BCA, ALG and BAM

Stocks With Unusual Put Option Activity:
1) GFI 2) PHM 3) KBH 4) TLT 5) VMC

Bull Radar

Style Outperformer:
Large-cap Growth (+.35%)

Sector Outperformers:
Semis (+5.10%), Airlines (+4.64%) and Retail (+3.11%)

Stocks Rising on Unusual Volume:
INTU, GYMB, HGIC, PETM, AXYS, IWOV, CPLA, HITT, NCTY, QGEN, NUVA, BIDU, CYBX, ALGT, HMSY, DECK, SHLD, CECO, NVLS, AMZN, KLAC, BKE, MW, GEO and TLT

Stocks With Unusual Call Option Activity:
1) TIF 2) ADBE 3) PRU 4) VMC 5) TGT

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Thursday Watch

Late-Night Headlines
Bloomberg:
- Default protection costs on Japanese corporate bonds rose, matching the record set last month, after the government said exports declined at the fastest pace in almost seven years. The Markit iTraxx Japan index of credit-default swaps traded 35 basis points higher at 330 as of 9:47 a.m. in Tokyo, matching the Oct. 27 record, according to prices from Credit Suisse Group AG. The iTraxx Australia index climbed 27.5 basis points to 345, Citigroup Inc. data show.

- Lead smelters in China, which accounts for about a third of global demand, are idling plants after battery makers slashed purchases, Xinling Refining Co. said. ``Most lead smelters have cut production or totally shut plants,'' He Yonggang, manager at Henan province-based Xinling Refining, said in an interview in Zhengzhou. Xinling has idled 60 percent of its 100,000 metric-tons capacity, he said. ``No one can tell when the market will recover.''

- Crude oil fell for a fifth day, trading near a 22-month low. U.S. fuel use during the past four weeks averaged 19.1 million barrels a day, down 7 percent from a year ago, an Energy Department report said yesterday. U.S. fuel demand fell 5.2 percent in the first 10 months of this year, the biggest drop since 1981, the American Petroleum Institute said in a report yesterday.

- U.S. motorists drove less in September for an 11th consecutive month even as gasoline prices declined, the Federal Highway Administration said. Vehicle-miles traveled fell 4.4 percent from a year earlier, the Washington-based agency said in a report today. The total has fallen by 90 billion since November 2007.

- Goldman Sachs Group Inc.(GS) closed at its lowest price since the firm first sold shares for $53 apiece to the public in 1999, as the profit outlook darkens for a company that set a record for Wall Street earnings last year. The stock fell $6.85, or 11 percent, to $55.18 in New York Stock Exchange composite trading, giving the company a market value of $26 billion. The New York-based firm's value reached a high of $105 billion, or $248 per share, on Oct. 31, 2007.

- Warren Buffett's Berkshire Hathaway Inc.(BRK/A) fell the most in at least 23 years, dropping for the eighth straight day since reporting a 77 percent decline in third- quarter profit. The stock plunged $11,550, or 12 percent, to $84,000 in New York Stock Exchange composite trading and has slipped 41 percent this year. Berkshire shareholders including Mohnish Pabrai, head of Pabrai Investment Funds, have said investors are concerned about losses on the company's $37 billion bet on world equity values more than a decade from now. Buffett sold contracts to undisclosed counterparties for $4.85 billion protecting the buyers against declines in four stock indexes including the S&P 500. Under the agreements, Berkshire will pay as much as $37 billion if, on specific dates beginning in 2019, the indexes are below the point where they were when he made the agreements. By Sept. 30, Berkshire had written down the contracts by $6.73 billion as the S&P declined for a fourth straight quarter. The cost to protect against Berkshire being unable to meet its debt payments, based on credit-default swaps, has more than tripled in two months. The swaps jumped to 475 basis points today from 129 points two months ago, according to CMA Datavision.

- Bill Clinton has sent President-elect Barack Obama’s transition team a list of more than 200,000 donors to his foundation, according to a Democrat familiar with the process, the latest sign both sides are trying to clear obstacles to Hillary Clinton’s possible nomination as U.S. secretary of state. The list of contributors ranges from those who gave a few dollars to wealthy foreign leaders and business people who donated multimillion-dollar gifts, the Democrat familiar with the matter said. If Hillary Clinton were to become secretary of state, her husband might decide to unwind his investments as the Clintons promised he would do if she were elected president. These include three Cayman Islands investment entities that Clinton joined through Yucaipa Cos. LLC, a company controlled by California billionaire Ron Burkle. Dubai Investment Group, an investment vehicle of the ruler of Dubai, Sheikh Mohammed bin Rashid al-Maktoum, has been among the partners with Burkle and Clinton in the Cayman Islands. During the primary campaign, Matt McKenna, a spokesman for Bill Clinton, said that, while the former president hadn’t then “severed ties” with Yucaipa, he “is taking steps to ensure” that “there will be an appropriate transition for those relationships” if his wife won the Democratic presidential nomination. Clinton’s office and a spokesman for Yucaipa would not say today if he has withdrawn from his Yucaipa involvement.

- Copper, the worst-performing metal since the commodities market crashed in July, may plunge to less than $1 a pound next year as global inventories swell, according to David Threlkeld, president of metals trader Resolved Inc. China is “sitting on a tremendous unsold inventory,” Threlkeld said today in a Bloomberg TV interview. The trader first got the world’s attention in 1996 when he showed that copper hoarding by Sumitomo Corp.’s Yasuo Hamanaka would lead to a collapse4, and he’s studied the market for 40 years. Copper production exceeded demand by 26,800 metric tons this year through September, the World Bureau of Metal Statistics said yesterday. Inventories monitored by the LME have more than doubled in the past six months and are at the highest since March 2004.

- The US Fed will probably cut interest rates to zero percent over the next two months to staunch deflation, according to JPMorgan Chase. The Fed will lower borrowing costs by 50 basis points at each of the next two policy meetings on Dec. 16 and Jan. 28, JPMorgan economist Michael Feroli wrote.

Wall Street Journal:
- As Detroit's auto makers seek a government bailout, the resilience of their foreign rivals could vault the South to the forefront of the U.S. car industry. Foreign makers have been lured to South Carolina, Alabama and other Southern states over the past decade by generous tax benefits and laws that make it easier to build a largely nonunion work force. Michigan and Ohio are still dominant centers of U.S. vehicle making, producing more than 38% of all cars and trucks in 2007, but Southern states are making gains as foreign car makers add more plants in that part of the country. Four Southern states were responsible for 24% of U.S. production last year, according to Automotive News, a trade publication.

- The effort to overhaul the nation's health system will begin next year with one clear advantage over previous attempts: A wide variety of interest groups are rooting for it to succeed rather than plotting to kill it. That is a stark contrast to the last big health-care initiative in the early 1990s, when many of the same groups helped block any major change. In addition, Barack Obama's choice of Tom Daschle, a former Senate Majority Leader, as Secretary of Health and Human Services, puts a skilled navigator of Capitol Hill in charge of the president-elect's bid to establish universal health care, which he has made a top priority.

MarketWatch.com:
- The federal government announced plans Wednesday to modify a program to make it easier for troubled homeowners to exchange problematic mortgages for more inexpensive ones. The new expedited regulations will expand on the Housing and Urban Development Department's Hope for Homeowners program.

The changes will give lenders a greater incentive to participate, by allowing them to write off less of the loan value than under the previous rules.

BusinessWeek:

- Auto Bailout: Seeking Signs of Sacrifice. House members push for workers to give up some pay and benefits, and ask why executives still don’t seem to get the need for change.

USA Today.com:

- Ford Motor(F) will announce Wednesday that it plans to beat Toyota (TM) at its own game when it comes to hybrids. It's the latest example of U.S. automakers trying to "out-hybrid" Japanese brands that had a head start with the gas savers. Also today, South Korea's Hyundai is expected to announce that in two years it will market its first U.S. hybrids. They will use a revolutionary lithium polymer battery that the company boasts will hold 20 times the charge in half the size of rivals' present hybrid batteries.

Reuters:

- Merck & Co Inc (MRK) expects competitive earnings growth from 2010 through 2013 despite challenges facing its products and looming patent expirations of important medicines, Chief Executive Richard Clark said on Wednesday. Clark said he is interested in acquiring late-stage products next year, which could be more affordable as biotechnology companies face a cash crunch from the weak economy. He also expressed confidence in medicines being developed internally.

- After decades of solid economic growth, China is battling an unknown as falling demand for its products triggers factory closures, sparks protests and raises fears of popular unrest.

Financial Times:
- With stock market volatility running close to all-time highs, trading equity volatility as a separate asset class is becoming more expensive and hedge funds are turning their attention instead to the commodities markets. Derivatives based on commodity indices provide cheaper access to the "long volatility" trade that has been among the most successful equity market strategies of the past two years.

- TPG, the US private equity firm, risks losing a substantial investment in a Chinese leasing venture after a business dispute in which the company's local staff called in police to remove TPG's representatives, people familiar with the matter say. The difficulties that developed between TPG and local managers of Nissin Leasing (China), a subsidiary of Japan's Nissin Group, underscore the risks of investing in China and come at a particularly bad time for the US private equity firm.

Late Buy/Sell Recommendations
- None of Note

Night Trading
Asian Indices are -5.25% to -2.50% on average.
S&P 500 futures -.87%.
NASDAQ 100 futures -.55%.

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Earnings of Note
Company/EPS Estimate
- (PDCO)/.45

- (PERY)/.31

- (DKS)/.06

- (BKS)/-.16

- (SSI)/-.20

- (GPS)/.34

- (HIBB)/.27

- (DELL)/.32

- (CRM)/.07

- (ADSK)/.54

- (BKE)/.63

- (GME)/.37

- (FL)/.26

- (HP)/1.18

- (DDS)/-.58

- (PLCE)/.84

Economic Releases
8:30 am EST

- Initial Jobless Claims are estimated to fall to 505K versus 516K the prior week.

- Continuing Claims are estimated to rise to 3900K versus 3897K prior.

10:00 am EST

- Philly Fed for November is estimated to rise to -35.0 versus -37.5 in October.

- Leading Indicators for October are estimated to fall .6% versus a .3% gain in September.

Upcoming Splits
- None of note

Other Potential Market Movers
- The weekly EIA natural gas inventory report, (AFFY) Analyst Day, (INWK) Investor Day, (AKAM) Analyst Meeting, CSFB Aerospace & Defense Conference, Needham Infectious Disease Conference and the UBS Technology & Services Conference could also impact trading today.

BOTTOM LINE: Asian indices are sharply lower, weighed down by commodity and financial stocks in the region. I expect US equities to open lower and to rally into the afternoon, finishing mixed. The Portfolio is 50% net long heading into the day.