Stocks Lower into the Final Hour on Profit-taking, Short-Selling and Global Growth Worries

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Retail longs, Biotech longs and Medical longs. I added (IWM)/(QQQQ) hedges today, 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 above average. Investor anxiety is high. Today’s overall market action is bearish. The VIX is rising .26% and is very elevated at 58.52. The ISE Sentiment Index is below average at 117.0 and the total put/call is slightly below average at .81. Finally, the NYSE Arms has been running high most of the day, hitting 2.39 at its intraday peak, and is currently 1.08. The Euro Financial Sector Credit Default Swap Index is falling another 8.91% today to 128.0 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 falling .99% to 257.34 basis points. The TED spread is falling .25% to 217 basis points. The TED spread is now down 247 basis points in two months. The 2-year swap spread is down 2.82% to 117.88 basis points. The Libor-OIS spread is rising 1.29% to 191 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 6 basis points to .24%, which is down 238 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 yielding -.01%, which is down 2 basis points today. Today’s action, while mildly disappointing, isn’t too bad considering recent gains. The 5.8% rise in semis, despite several earnings shortfall announcements, bodes well for tech shares. I suspect we will get some more weakness early tomorrow, before stabilizing later in the afternoon. Nikkei futures indicate a -5 open in Japan and DAX futures indicate a -69 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on profit-taking, more shorting and global growth worries.

Today's Headlines

Bloomberg:
- Stocks will climb in 2009 as investors anticipate a recovery, according to strategists at Goldman Sachs, Credit Suisse Group, Deutsche Bank and Merrill Lynch. The S&P 500 may rise 21% to 1,100 by the end of 2009 from yesterday’s closing price of 909.7, Goldman’s chief investment strategist David Kostin wrote today. The S&P 500 will go “meaningfully higher” as the government takes steps to revive the economy, access to credit improves, home prices stabilize and bank writedowns decline, Kostin wrote. Credit Suisse strategists forecast the main benchmark for American equities will end 2009 at 1,050.

- The cost of protecting corporate bonds from default fell for a second day as the U.S. government moved closer to agreeing a bailout for General Motors Corp. and Chrysler LLC. Credit-default swaps on the Markit CDX North America Investment Grade Index of 125 companies in the U.S. and Canada decreased 1.5 basis points to 258.5, according to CMA Datavision prices at 12:45 p.m. in New York. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-risk, high-yield credit ratings dropped 13 basis points to 1,002, according to JPMorgan Chase & Co. prices.

- The Brazilian real’s four-month, 33 percent tumble is prompting Brown Brothers Harriman & Co. and Standard Chartered Bank to abandon calls for an early 2009 rebound and predict further declines. The real may fall as much as 11 percent by year-end to 2.75 per dollar, said Win Thin, a senior currency strategist at New York-based Brown Brothers, which manages $42 billion. Standard Chartered, the U.K. bank that makes most of its profit from emerging markets, revised its first-quarter forecast last week to 2.7 from 2.15.

- The cost of borrowing in dollars for three months in London fell as traders bet the Federal Reserve will cut its key interest rate to as low as 0.25 percent next week to drag the U.S. economy out of a recession. The London interbank offered rate, or Libor, that banks say they charge each other for three-month loans in dollars dropped three basis points to 2.16 percent today, the lowest level since Nov. 21, the British Bankers’ Association said. The comparable euro rate tumbled eight basis points to 3.42 percent, the weakest since September 2006.

- Michael Lewis, head of commodities research at Deutsche Bank AG, says $30 oil is new ‘low point.’ (video)

- Crude oil fell for the seventh time in eight days after the U.S. forecast that global demand will decline this year and in 2009 for the first time since 1983.

- Cisco Systems Inc.(CSCO), General Electric Co.(GE) and Emcor Group Inc.(EME) may be winners as President-elect Barack Obama seeks to revive the U.S. economy by rewiring classrooms and libraries for high-speed Internet service and repairing bridges and highways.

- Pressure from insurers such as Aetna Inc. and WellPoint Inc. and the need to cut hospital costs are speeding a move by doctors to computer recordkeeping, said Glen Tullman, chief executive officer of Allscripts-Misys Healthcare Solutions Inc.(MDRX)

- Airline industry losses in 2009 may shrink to half this year’s level as a decline in fuel costs more than makes up for a reduction in the number of people flying.

- Harvard University, the University of Texas and other U.S. university endowments might decrease their hedge-fund holdings because of commitments to private-equity investments, according to a survey. Sixty of the largest U.S. endowments put $23 billion in hedge funds in the past two years, the London-based research company InvestHedge said in an e-mailed statement today. Those top university endowments, which invest donated money to fund school operations, have $63 billion in hedge funds. “The future growth of these portfolios is obviously in jeopardy given the current market crisis,” InvestHedge said. Hedge funds might be put “on the backburner” when endowments have obligations to provide cash for investments arranged by private-equity managers, it said.

- Treasuries rose, pushing rates on the three-month bill to negative 0.01 percent, as investors gravitate toward the safety of U.S. government debt. “It’s the year-end factor,” said Chris Ahrens, an interest-rate strategist in Greenwich, Connecticut, at UBS Securities LLC, one of the 17 primary dealers that trade directly with the Federal Reserve. “Everyone wants to be in bills going into year-end. Buy now while the opportunity is still there.” “It’s been such a horrible year people want to show they have the good stuff on their balance sheets, not the bad stuff, but with yields already so low it pushes these even lower,” said Theodore Ake, the head of Treasury trading in New York at Mizuho Securities USA Inc., another primary dealer.

Wall Street Journal:

- EU Emission Curbs Stoke Up Steel Firms. Industry Says Carbon-Dioxide Trading Market, Caps on Factories and Power Plants Threaten High-Paying Jobs. The European Union is facing mounting pressure from European-based steel companies to reshape the world's largest carbon-trading system or face a massive loss of jobs. The conflict pits the EU's environmental goals against its desire to keep high-paying jobs on the Continent.

- Federal regulators are preparing a rescue plan to shore up the finances of some large credit unions, using billions of dollars in new government borrowings. The plan, expected to be announced this week, involves tapping into a $41 billion lending facility that Congress made available to credit-union regulators in September.

FINalternatives:

- Lessons Learned From 2008: Hedge Funds Need to Diversify Custodial, Operational Risk.

CNNMoney.com:

- Citadel under siege. Ken Griffin’s $15 billion firm was flirting with disaster this fall. In a rare interview, he explains how it survived.

Chicago Tribune:

- U.S. Atty. Patrick Fitzgerald said today that federal authorities arrested Illinois Democratic Gov. Rod Blagojevich this morning because the governor went on "a political corruption crime spree" that needed to be stopped. Fitzgerald said secret tape recordings showed Blagojevich was attempting "to sell the U.S. Senate seat" that President-elect Barack Obama recently vacated. Fitzgerald said, "We make no allegations" that Obama was aware of any alleged scheming by Blagojevich. The governor has the sole power to pick Obama's replacement under the state constitution. "The conduct would make Lincoln roll over in his grave," Fitzgerald said, quoting Blagojevich as saying the Senate seat is "a bleeping valuable thing. You just don't give it away. ... I've got this thing and it's bleeping golden."

LA Times:

- US scrap paper prices have fallen as much as 75% in the last six weeks, with much of the decline due to a drop in demand from China, citing industry executives including Peter Wang, CEO of America Chung Nam Inc., the largest US wastepaper supplier.

Washington Post:

- Internal Freddie Mac(FRE) documents show that senior executives at the company were warned years ago that they were offering mortgages that could pose dangers to the firm, hurt borrowers and generate more risky loans throughout the industry. At Fannie Mae(FNM), top executives were told it was necessary to develop "underground" efforts to buy subprime mortgages because of competitive pressures, although there were growing risks and borrowers often didn't understand the terms of the loans, documents show.

Oil Voice:

- The status of the global economy has become the most important driver of oil consumption growth and EIA’s oil consumption projections continue to be revised downward in response to lower forecasts for global economic growth. As a result, global oil consumption is expected to decline by 50,000 bbl/d in 2008 and by 450,000 bbl/d in 2009, which would mark the first time in 3 decades that world consumption would decline in 2 consecutive years. In both years, growth is concentrated in countries outside of the Organization for Economic Cooperation and Development (OECD), especially China, the Middle East, and Latin America.

Lloyd’s List:

- New ship prices will drop by a third next year and the number of orders will decline 60%, citing Bao Zhangjing, an official at the China Shipbuilding Economy Research Center. Owners will defer orders in anticipation of falling prices, Bao said at a conference in Shanghai today.

Kommersant:

- Russia Rail Shipping Fell 20% in November.

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Valor Economico:
- Brazil forecast slower growth in energy consumption this year and in 2009 than previously expected amid the global credit crisis. Energy use my increase 4% this year compared with a previous forecast of a 4.9% gain, citing Mauricio Tolmasquim, head of the government’s energy research agency.

Bear Radar

Style Underperformer:
Small-cap Value (-2.05%)

Sector Underperformers:
REITs (-7.44%), Road & Rail (-6.36%) and HMOs (-5.60%)

Stocks Falling on Unusual Volume:
BK, IBOC, BCE, ALE, DWSN, SQM, IBOC, BIDU, FDX, CNW and ODFL

Stocks With Unusual Put Option Activity:
1) NSM 2) LVLT 3) VMC 4) KR 5) COH

Bull Radar

Style Outperformer:
Small-cap Growth (+2.29%)

Sector Outperformers:
Semis (+8.28%), Oil Service (+4.84%) and Internet (+3.19%)

Stocks Rising on Unusual Volume:
NSM, NETL, GMXR, ARD, CMC, HES, PBR, TLK, CCI, TUP, DB, BBV, GTIV, WPPGY, PSMT, SNDA, IACI, NAVG, BRCM, NFLX, SMTC, AFAM, STRA, SYUT, ZEUS, MGRC, LEAP, ALTR, CYMI, SHLM, SCHN, EMG, XSD, PKB, AKO/A, SHG, BBV, CX, ASA, IGW, AZO and CBI

Stocks With Unusual Call Option Activity:
1) PCL 2) ERIC 3) CMCSK 4) KR 5) BIIB

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Tuesday Watch

Late-Night Headlines
Bloomberg:

- Saudi Arabia, the world’s largest crude oil exporter, is furthest from complying with OPEC quotas, dulling the impact of the group’s policy as members prepare to make a fresh cut in production targets. Saudi Arabia is currently producing at 107% of its OPEC quota, according to Bloomberg estimates. “In a shrinking market, the disparate nature of the group means that any further cuts could have a diminishing effect,” John Hall, managing director of John Hall Assoc. Ltd., said. “Initial estimates reveal that compliance with the October cut is put at between half and three-quarters at best.”

- Ford Motor Co.(F), the second-biggest U.S. automaker, said it won’t seek a short-term bridge loan from the government because it doesn’t face a “near-term liquidity issue.” “As we told Congress, Ford is in a different position,” the Dearborn, Michigan-based company said in a statement.

- The cost of protecting investors in Japanese and Australian corporate bonds against default declined, according to traders of credit-default swaps. The Markit iTraxx Japan index of credit-default swaps fell 22.5 basis points to 332.5 at 10:29 a.m. in Tokyo, according to prices from Credit Suisse Group AG. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan dropped 20 basis points to 375, BNP Paribas SA prices show. The Markit iTraxx Australia index was quoted 25 basis points lower at 360, according to Credit Suisse.

- Hong Kong’s luxury home sales fell in both quantity and value in November from a month earlier, as the slowing economy hurt the purchasing power of the wealthy. Transactions of apartments and houses valued at more than HK$10 million ($1.3 million) fell 34 percent to 92 last month, with the deal value tumbling 62 percent to HK$2.08 billion, according to figures compiled by realtor Centaline Property Agency Ltd. Both numbers are the lowest since September 2003, the agency said in a press release yesterday.

- BHP Billiton Ltd.(BHP), the world’s biggest mining company, shipped the least amount of iron ore from Australia in nine months amid plunging demand from China. “They are getting treated the same as everyone else and the customers don’t want their product,” Peter Arden, an analyst at Ord Minnett Ltd., an affiliate of JPMorgan Chase & Co., said from Melbourne. “Demand has seemingly collapsed.” Vale, based in Rio de Janiero, halted output at two iron ore pellet plants in Brazil yesterday, citing an “unprecedented contraction” in demand. Pellets are the first product buyers cut because they are more expensive than alternatives, Gilberto Cardoso, an analyst at Banif Securities in Rio de Janeiro, said.

- China, the world’s biggest copper consumer, asked BHP Billiton Ltd.(BHP) and other mining companies to accept a 74 percent increase in copper processing fees next year, two industry officials involved with the negotiations said. Chinese smelters are asking for the first increase in fees, also called TC/RCs, since 2006 as an oversupply of ore weakens the bargaining power of BHP and other mining companies.

- The Treasury sold $27 billion in three-month bills at the lowest rate since it starting auctioning the securities in 1929. “It’s all about capital preservation,” said John Canavan, a fixed-income analyst in Princeton, New Jersey, at Stone & McCarthy Research Associates. “People are afraid to put their money anywhere else so they aren’t terribly concerned about returns.” The rate on three-month bills peaked at 16.75 percent in May 1981, according to Federal Reserve data.

- North Korea, plagued by years of famine, will “urgently” need food aid for 40 percent of its population, the United Nations’ Food and Agriculture Organization and the World Food Programme said in a report yesterday.

- Top executives at Morgan Stanley(MS) and Merrill Lynch & Co.(MER) will give up their bonuses this year.

- FedEx Corp.(FDX) fell 12 percent in late trading after the second-biggest U.S. package-shipping company said annual profit may be as much as one-third lower than analysts expected because of a “significantly weaker” economy. Earnings for the fiscal year ending in May will be in a range of $3.50 to $4.75 a share, down from an earlier projection of $4.75 to $5.25, the Memphis, Tennessee-based company said in a statement today.

- Texas Instruments Inc.(TXN), the second- largest U.S. chipmaker, reduced its profit and sales forecasts as the economic slump cut into demand for electronics.

Wall Street Journal:

- Restore the Uptick Rule, Restore Confidence by Charles Schwab.

- A violent market downturn and the government's decision to impose wide-ranging restrictions on short selling in September were just too much for Copper River Management. After losing more than half of its value in the last couple of months, the Larkspur, Calif., fund is liquidating and returning funds to its investors. The fund had originally been considering its options, including shutting down some offices and continuing on as a smaller entity. But the enormity of its losses might have been too much from which to rebound.

- Congress and the White House inched toward a financial rescue of the Big Three auto makers, negotiating legislation that would give the U.S. government a substantial ownership stake in the industry and a central role in its restructuring. Under terms of the draft legislation, which continued to evolve Monday evening, the government would receive warrants for stock equivalent to at least 20% of the loans any company receives. The company also would have to agree to limits on executive compensation and dividend payments, much like those contained in the government's $700 billion rescue of the financial industry.

NY Times:
- Hopes that Russia and other emerging markets could help support the automotive industry despite a slumping performance in the United States and Europe dimmed on Monday as the Ford Motor Company followed Volkswagen and Renault in suspending production at its Russian assembly line.

CNNMoney.com:
- Two co-heads of Goldman Sachs' special situations group, the bank's vast and secretive principal investment arm, have left. Nick Weber, 36 years old, co-head of the European special situations group in London, left at the end of last month. He previously worked for Mark McGoldrick, the group's former global head who was dubbed "Goldfinger" for his stellar record. Weber intends to spend time with his family but may look at other opportunities next year, according to a source familiar with his plans. Weber confirmed his retirement but declined to comment further. Alan Waxman, global co-head of the group in New York and a partner, also retired at the end of last month. He could not be reached for comment.

USA Today.com:

- The average retail price for gasoline dropped 11 cents in the last week to $1.70 a gallon, the cheapest price since February 2004, the Energy Information Administration said Monday. The national price for regular unleaded gasoline is down $1.30 from a year ago, the EIA said in its weekly survey of service stations.

Nikkei:

- Japan to Cut Inheritance Tax on Family Businesses.

China Daily:

- As top Chinese policymakers ponder ways to ensure GDP growth of at least 8 percent next year, the government is "very likely" to initiate cuts in business taxes to add impetus to the slowing economy.

Late Buy/Sell Recommendations
- None of note

Night Trading
Asian Indices are -.50% to +1.50% on average.
S&P 500 futures -.62%.
NASDAQ 100 futures -.60%.

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Earnings of Note
Company/EPS Estimate
- (ALOG)/.53

- (MTN)/-.83

- (AZO)/2.19

- (JW/A)/.62

- (TTC)/.05

- (ADCT)/.12

- (COO)/.57

- (PLL)/.37

- (KR)/.39

- (GIII)/1.61

Economic Releases
10:00 am EST

- Pending Home Sales for October are estimated to fall 3.0% versus a 4.6% decline in September.

Upcoming Splits
- None of note

Other Potential Market Movers
- The weekly retail sales reports, IBD/TIPP Economic Optimism Index, Campbell Soup analyst meeting, UMH Properties investor forum, Sonoco Products analyst meeting, Delta Air analyst meeting, ArvinMeritor analyst day, Agilent analyst meeting, IBC Life Sciences Biopharma Manufacturing and Development Summiut, Merrill Lynch Small-cap investor forum, UBS Media/Communications Conference and Barclays Tech Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by commodity and shipping stocks in the region. I expect US equities to open modestly lower and to rally into the afternoon, finishing mixed. The Portfolio is 100% net long heading into the day.