Wednesday Watch

Late-Night Headlines
Bloomberg:

- The yen fell against the euro after Asian stocks rose, encouraging investors to increase holdings of higher-yielding assets funded with Japan’s currency.

- Toyota Motor Corp., Hyundai Motor Co., and Honda Motor Co., led gains by Asian automakers after the Bush administration agreed with congressional Democrats on the broad outlines of legislation to give General Motors Corp. and Chrysler LLC federal loans to keep operating. Hyundai, South Korea's largest carmaker, jumped as much as 7.5 percent in Seoul trading Honda rose as much as 6.5 percent and Toyota added 2.6 percent on the Tokyo Stock Exchange.

- Citigroup Inc.(C) had the biggest increase in shares sold short among New York Stock Exchange companies in the second half of November as the world’s biggest financial-services company tumbled 60 percent on concern about toxic assets and a capital shortage. Citigroup short selling increased by 56.1 million shares, or 44 percent, to 182.5 million shares between Nov. 14 and Nov. 28, according to exchange data compiled by Bloomberg. Short selling of Bank of America Corp.(BAC), the nation’s third- largest lender, rose by 18.9 million shares for the second- biggest jump among stocks listed on the NYSE. Borrowed shares of Alcoa Inc.(AA), the largest U.S. aluminum producer, increased 29 percent to 61 million as the industrial metal fell to a three-year low.

- Foreign direct investment in China fell 36.5 percent in November from a year earlier as gains by the yuan stalled and the world’s fourth-biggest economy cooled.

- Rod Blagojevich today followed in the footsteps of his predecessors: He became the fourth of the past seven governors elected in Illinois to be arrested. Residents blame the sad tradition on a culture of patronage. “Government in Illinois isn’t about political ideology or helping people,” said Christopher Mooney, who teaches political science at the University of Illinois-Springfield. “It’s about which idiot brother-in-law are you going to get a job on a road crew because he helped you get into office.” The governor, a Democrat, was charged with trying to sell Barack Obama’s vacated Senate seat, according to a criminal complaint filed by prosecutors. Three previous governors were jailed for receiving bribes: Otto Kerner, governor from 1961 to 1968; Dan Walker, who held the job from 1973 to 1977; and George Ryan, who served from 1999 to 2003.

- President-elect Barack Obama said he was unaware of the criminal investigation into an alleged attempt by Illinois Governor Rod Blagojevich to trade an appointment for Obama’s Senate seat for financial gain. “I had no contact with the governor or his office and so I was not aware of what was happening, ” Obama told reporters today in Chicago. “It’s a sad day for Illinois. Beyond that, I don’t think it’s appropriate to comment.” Federal prosecutor Patrick Fitzgerald said there is “no allegation” that Obama was aware of Blagojevich’s attempt to extract benefits from his authority to appoint Obama’s successor.

- Russia’s credit rating may drop below investment grade for the first time in four years as lower oil prices push the budget into deficit and drain foreign-currency reserves, according to RBC Capital Markets. “The Russian budget assumes an oil price of $70 a barrel so if oil stays around $40 or 445 then economic fundamentals will deteriorate rapidly,” said Nigel Rendell, emerging-market strategist at RBC in London. “There is a severe risk Russia will be downgraded to speculative grade.”

- Short selling of Warren Buffett’s Berkshire Hathaway Inc.(BRK/A) rose to its highest level in six years on speculation that costs tied to derivative contracts will drive down the insurer’s stock price. Short-selling increased by 1,013 shares, or 29 percent, to 4,495 between Nov. 14 and Nov. 28, the most bet on Berkshire’s decline since 2002, according to data compiled by Bloomberg.

- Morgan Stanley(MS) and its gasoline distributor TransMontaigne Inc. are under investigation in Florida for price gouging during Hurricane Ike, state law enforcers said. Florida received thousands of complaints of gasoline stations charging inflated prices after a state of emergency was declared as the storm approached in September, Attorney General Bill McCollum and Consumer Services Commissioner Charles Bronson said in a release today.

- Electronic Arts Inc.(ERTS), the world’s second-largest maker of video games, said fiscal 2009 revenue and profit will be less than forecast because of slow holiday sales in North America and Europe.

- Asian money-market rates declined on expectations the Federal Reserve will cut its key interest rate and after Australian banks raised cash through share and bond sales, easing a year-end funding squeeze.

Wall Street Journal:

- Private equity investors plan to boost their exposure to the asset class despite being fully or even over-allocated, according to research released Wednesday. Plummeting equity and credit markets have left many investors with outsized allocations to private equity, but rather than sell assets the majority of investors plan to maintain or increase target allocations.

- U.S. securities regulators need to do more to curb short-selling abuses, a group of academics, business executives and former top regulators said Tuesday. The Securities and Exchange Commission should close loopholes and enforce current rules against "naked" short selling, said Harvey Pitt, former SEC chairman and now chief executive of Kalorama Partners, a Washington, D.C., consulting firm. "The agency has to make it clear that naked short selling in any form is prohibited," Pitt said at a midday press conference.

- American International Group Inc.(AIG) owes Wall Street's biggest firms about $10 billion for speculative trades that have soured, according to people familiar with the matter, underscoring the challenges the insurer faces as it seeks to recover under a U.S. government rescue plan.

NY Times:
- Fannie Mae and Freddie Mac engaged in “an orgy of junk mortgage development” that turned the two mortgage-finance giants into vast repositories of subprime and similarly risky loans, a former Fannie executive testified on Tuesday.

Barron’s:

- Apple(AAPL): How Many iPhones Could Wal-Mart(WMT) Sell?

- HedgeFund.net today released early estimates indicating total hedge fund assets fell an additional 5.2% in November to $2.11 trillion, largely due to investors redeeming a record $130.04 billion during the month. Hedge fund performance losses slowed in November, but remained negative for the sixth month in a row.

Financial Times:
- I think of it as an "oops" moment: the US goes into a recession; Europeans believe this deserved punishment has little to do with them; the European economy slows unexpectedly; the US throws everything at restoring growth; finally, the US recovers, pulling Europe behind it. Yet this is not just a slow-down. It is also a financial crisis. What if the solvency of a eurozone member came into doubt? After all, spreads over rates on German bunds and the prices of credit default swaps have risen already, the most affected countries being Belgium, Greece, Ireland, Italy, Portugal and Spain.

International Herald Tribune:

- The Mumbai police said Tuesday that the 10 men who carried out the terrorist attacks here belonged to a group of 30 recruits of the Lashkar-e-Taiba Pakistani militant organization who had been selected for suicide missions, and that the whereabouts of the other 20 were unknown. It was the first time that that the Indian police had disclosed the larger number of suicide recruits, and while they said there was no reason to believe that the other 20 were in India, they expressed concern about such a possibility.

China Daily:

- China needs to keep its urban unemployment rate below 5% next year to prevent rising joblessness among migrant workers which could spark social unrest, citing a senior legislator. An increase in the urban unemployment rate to more than 5%, from the current 4%, will “lead to a series of negative consequences,” citing Zheng Gongcheng, a member of the National People’s Congress’s Standing Committee.

Late Buy/Sell Recommendations
Citigroup:
- Rated (AXP) Sell, target $19.

Night Trading
Asian Indices are -.50% to +3.0% on average.
S&P 500 futures +1.05%.
NASDAQ 100 futures +.86%.

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Earnings of Note
Company/EPS Estimate
- (CKR)/.12

- (KFY)/.29

Economic Releases
10:00 am EST

- Wholesale Inventories for October are estimated to fall .2% versus a .1% decline in September.

10:35 am EST

- Bloomberg consensus estimates call for a weekly crude oil inventory increase of 1,300,000 barrels versus a -456,000 barrel decline the prior week. Gasoline supplies are expected to fall by -400,000 barrels versus a -1,534,000 barrel decline the prior week. Distillate inventories are estimated to fall by -1,500,000 barrels versus a -1,721,000 barrel decline the prior week. Finally, Refinery Utilization is expected unch. versus a -1.82% decline the prior week.

2:00 pm EST

- The Monthly Budget Deficit for November is estimated at -$171.0 billion versus -$98.2 billion in October.

Upcoming Splits
- None of note

Other Potential Market Movers
- The weekly MBA mortgage applications report, Owens & Minor investor day, Parker Hannifin analyst meeting, VistaPrint analyst meeting, Principal Financial Group analyst meeting, Yum! Brands analyst conference, UBS Media/Communications Conference, RBC Healthcare Conference, Goldman Sachs Financial Services Conference and Barclays Tech Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by automaker and real estate stocks in the region. I expect US equities to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 75% net long heading into the day.

Stocks Finish Lower, Weighed Down by REIT, Transport, Homebuilding, Bank and Alternative Energy Shares

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In Play

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