Thursday Watch

Late-Night Headlines
Bloomberg:

- American International Group Inc.(AIG), the insurer rescued by the U.S. government, made $18.7 billion in payments tied to credit-default swaps to banks including Goldman Sachs Group Inc.(GS) and Societe Generale SA, according to a person briefed on the situation. The insurer sent the money to the banks in the three weeks after AIG’s Sept. 16 bailout, said the person, who declined to be named because the information is confidential. The banks bought the swaps from AIG as protection on mortgage securities that plunged in value.

- Asian money-market rates extended declines after the Bank of Korea slashed interest rates to a record low as policy makers seek to revive lending and counter a year-end funding squeeze. Australian financing costs fell a second day after banks including Westpac Banking Corp., the nation’s biggest by market value, raised $8 billion this week selling equity and debt. The difference between the rate Australian banks charge each other for three-month loans and the overnight swap rate, a gauge of cash scarcity, fell to 71 basis points at 12:03 p.m. in Sydney.

- China’s inflation cooled to the weakest pace in almost two years, signaling that growth is slumping and the economy is at risk of deflation. Consumer prices rose 2.4 percent in November from a year earlier, the statistics bureau said today, after gaining 4 percent in October. That was less than the 3.3 percent median estimate of 18 economists surveyed by Bloomberg News. Telecommunications prices tumbled 19 percent, pork fell 9.3 percent and garments declined 2 percent.

- The cost of protecting Asia-Pacific bonds from default declined, credit-default swaps show. The Markit iTraxx Australia index fell 10 basis points to 360 as of 11:51 a.m. in Sydney, Citigroup Inc. data show. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan was 5 basis points lower at 375 at 9:20 a.m. in Hong Kong, Barclays Capital prices show. The Markit iTraxx Japan index declined 2.5 basis points to 330 at 10:23 a.m. in Tokyo, according to Barclays Capital.

- Connecticut State Treasurer Denise Nappier is proceeding with a plan to invest in hedge funds after market turmoil wiped out $5 billion of pension assets. Nappier, first elected treasurer in 1998, will begin allocating up to 8 percent of the $20 billion she oversees for public sector employees and teachers into hedge funds after the state’s investment advisory council approved the plan today. Connecticut, which claims to be the world hedge fund capital, is one of the few states that doesn’t invest its public pension in the asset class.

- Pfizer Inc. and Tiffany & Co. are among eight stocks that Benjamin Graham, the father of value investing and Warren Buffett’s mentor, would buy, Grant’s Interest Rate Observer said. Cooper Industries Inc., Nucor Corp., Cintas Corp., Archer Daniels Midland Co., Molex Inc. and RadioShack Corp. also meet the seven criteria Graham presented in 1973 for stocks that a “defensive investors might buy with confidence,” according to the latest issue of Grant’s, which was released today. “That there are as many as eight is a notable fact,” the newsletter said. “In March 2003, near what would prove to be the bottom of the post-Nasdaq washout, Grant’s could identify only two that met the grade.”

- Posco will make a record 6 trillion won ($4.4 billion) investment in South Korea next year, as Asia’s third-largest steelmaker takes advantage of spending cuts by rivals in Europe and Japan. The South Korea-based mill will expand capacity for products including heavy plates for ships and invest in furnace overhauls, spokeswoman Ko Min Jin said by phone today. Spending will rise from the 3.4 trillion won this year, the company said in an e-mailed statement.

Wall Street Journal:

- The scandal surrounding Illinois Gov. Rod Blagojevich's alleged attempt to sell President-elect Barack Obama's former U.S. Senate seat widened on Wednesday, threatening to taint a rising Democratic star and pull in one of the nation's biggest labor unions. An attorney for Rep. Jesse Jackson Jr. -- the son of longtime civil-rights activist and Chicago politician the Rev. Jesse Jackson -- said the congressman is likely the person referred to as "Senate Candidate No. 5" in a federal criminal complaint that alleges Gov. Blagojevich engaged in a broad range of influence-peddling and fund-raising schemes. U.S. Attorney Patrick Fitzgerald said Gov. Blagojevich was caught on a wiretap claiming that he'd been offered more than $500,000 by a representative of Senate Candidate No. 5 in exchange for Mr. Obama's Senate seat. James Montgomery Sr., attorney for Rep. Jackson Jr., denied that the congressman or his representatives sought a deal. Separately, the federal investigations cast a shadow over the Service Employee International Union, a fast-growing alliance of more than two million workers. Tuesday's complaint noted that Gov. Blagojevich spoke at least twice with an SEIU official to discuss a separate possible candidate for the vacant Illinois seat.

- The House of Representatives passed the wide-ranging rescue of the nation's auto makers, but Republican critics in the Senate raised objections that could endanger the initiative. Democrats and the Bush White House hoped for a Senate vote as early as Thursday and enactment by week's end. The legislation, approved 237-170 by the House, would provide money within days to cash-starved General Motors Corp. and Chrysler LLC. Ford Motor Co., which has said it has enough to stay afloat, would also be eligible for federal aid.

- President-elect Barack Obama has picked a Nobel laureate, a former Environmental Protection Agency administrator, and officials from New Jersey and Los Angeles to run his energy and environmental initiatives, putting heft into roles likely to dominate domestic policy in his first years in office.

MarketWatch.com:
- According to a valuation model from a research firm with an excellent long-term record, the stock market is likely to be significantly higher in several years' time -- regardless of whether the final low of the last year's bear market has been seen.

The firm in question is Ford Equity Research of San Diego. Ford Equity’s model shows stocks are the most undervalued since 1974.

CNBC.com:
- Berkshire Hathaway's(BRK/A) stake in Burlington Northern Santa Fe(BNI) is up to 19.83 percent, after Warren Buffett's holding company bought 3.3 million additional shares on Monday and Tuesday.

NY Times:
- Those Funny YouTube Videos Are Pulling in Serious Money.

BusinessWeek:

- Volkswagen’s Big Bet on Tennessee. Despite the industry’s travails, the German automaker expects to boost US sales with its $1 billion investment in Chattanooga factory set to make midsize cars.

CNNMoney.com:
- Cisco’s(CSCO) Grand Video Plan.

Forbes.com:

- Green Mountain’s(GMCR) Sizzling Shares.

USA Today.com:

- Ford(F) benefits from CEO’s turn to road less traveled.

Reuters:

- Goldman Sachs on Thursday cut its growth forecast for China next year to 6 percent, the lowest prediction from any major bank, after a batch of extremely weak trade data across Asia. The bank had previously called for 7.5 percent expansion next year. The forecast for 6 percent growth next year comes in well below the 8 percent median estimate of a dozen institutions polled by Reuters last week. It would also mark the country's weakest growth since 1990 when the economy was disrupted by trade sanctions imposed after the Tiananmen crackdown. Chinese media have reported that Beijing is determined to "protect eight" next year, referring to the 8 percent growth that is widely thought necessary to absorb the millions of people entering the country's labor force every year.

- Money market fund assets climbed to a record $3.71 trillion in the latest week, the 11th straight weekly record, as falling yields failed to damp investors' flight to quality, according to the Money Fund Report. The same flight to quality pushed rates on three-month Treasury bills into negative territory on Tuesday amid bets that the Federal Reserve will keep cutting rates to avoid a deep, sustained recession.

Financial Times:
- Lippo Group, the Indonesian conglomerate that is one of Asia's leading real estate companies, has earmarked about $500m to make its first property investments in US and European cities and take advantage of tumbling valuations there.

- AIG is planning to announce more than $15bn worth of disposals before the end of the year - a move that would enable the stricken US insurer to pay back part of a $60bn government loan and ease the burden of its $150bn federal bail-out.

- Goldman Sachs (GS) is to change its retirement rules, giving long-serving employees an incentive to leave before the end of the year, in a move that could add to the 3,000-plus redundancies already announced by the Wall Street bank.

- One possible outline of the future of hedge funds is beginning to emerge from the wreckage of the industry's six-year boom, and it looks very much like the business did in the 1980s, but with lower fees. Several of the biggest hedge funds, including the venerable Tudor Investment Corp, run by Paul Tudor Jones, are returning to their roots as traders of the most liquid currency, interest rate and equity index markets. Both have split off toxic, hard-to-sell assets into special vehicles from which investors cannot withdraw their money. Other funds trading illiquid instruments - credit, structured products and complex derivatives - are stopping investors getting their money back, as they try to defer forced sales of assets. Many are likely to shut down as they eventually pay back disgruntled clients.

- The moribund market for corporate finance received a boost on Wednesday when Verizon Wireless, a joint venture between Verizon Communications (VZ) and Vodafone Group, closed a $17bn syndicated loan, the largest in the US this year. The deal, arranged by Morgan Stanley (MWD) , Bank of America (BAC) and Citigroup (C) , will enable Verizon Wireless to refinance the debt it took on in June when it bought Alltel, a regional telecoms group, for $28.1bn from TPG and Goldman Sachs (GS).

Late Buy/Sell Recommendations
Credit Suisse Group:

- South Korea’s economy will contract .3% next year on weaker-than-expected exports, Credit Suisse Group said. The brokerage had previously forecast South Korea’s economy would expand 1.5% in 2009.

Night Trading
Asian Indices are -.25% to +1.0% on average.
S&P 500 futures -.46%.
NASDAQ 100 futures -.27%.

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Economic Releases
8:30 am EST

- The Trade Deficit for October is estimated to shrink to -$53.5 billion versus -$56.5 billion in September.

- The Import Price Index for November is estimated to fall 4.9% versus a 4.7% decline in October.

- Initial Jobless Claims for last week are estimated to rise to 525K versus 509K the prior week.

Upcoming Splits
- None of note

Other Potential Market Movers
- The weekly EIA natural gas inventory report, Belden Analyst Day, Dreamworks Animation analyst day, Danaher analyst meeting, Regency Centers analyst day, United Technologies investor day, Procter & Gamble analyst meeting, Barclays Tech Conference, RBC Healthcare Conference, Goldman Sachs Financial Services Conference and the Keybanc Engineering/Construction Conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by automaker 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 100% net long heading into the day.

Stocks Finished Higher, Boosted by REIT, Construction, Restaurant, Commodity and Homebuilding Shares

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In Play

Stocks Higher into Final Hour on Less Economic Pessimism, Short-Covering and Declining Credit Market Angst

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Retail longs, Biotech longs, Internet longs and Medical longs. I covered all my (IWM)/(QQQQ) hedges today, thus leaving the Portfolio 100% net long. The tone of the market is bullish as the advance/decline line is higher, most sectors are gaining and volume is about average. Investor anxiety is above average. Today’s overall market action is mildly bullish. The VIX is falling 3.94% and is very elevated at 56.58. The ISE Sentiment Index is around average at 145.0 and the total put/call is slightly above average at .93. Finally, the NYSE Arms has been running around average most of the day, hitting 1.2 at its intraday peak, and is currently .93. The Euro Financial Sector Credit Default Swap Index is falling .78% today to 128.67 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 rising 4.99% to 270.17 basis points. The TED spread is falling 3.92% to 209 basis points. The TED spread is now down 257 basis points in two months. The 2-year swap spread is down 6.77% to 108.50 basis points. The Libor-OIS spread is falling 3.68% to 184 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 1 basis point to .23%, which is down 239 basis points in about 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 up 2 basis points today. Small-caps and cyclicals have outperformed throughout the day on diminishing economic pessimism. If it were not for the mild weakness in the (XLF) I suspect the major averages would be up much more today. It is noteworthy that the recent uptick in commodities has barely budged inflation expectations. I still think the sectors with the worst declines this year will outperform through year-end on short-covering and bargain-hunting. The TED spread is starting to roll over again, which is a large positive. Nikkei futures indicate a -15 open in Japan and DAX futures indicate an +16 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, falling credit market angst and less economic pessimism.

Today's Headlines

Bloomberg:
- Goldman Sachs Group Inc.(GS), one of the top five U.S. municipal bond underwriters, is angering politicians and public-finance officials in New Jersey, Wisconsin, California and Florida by recommending that investors purchase credit-default swaps to bet against 11 states’ debt. It’s “disturbing” to advise investors to bet against the financial health of a state whose bonds Goldman helps sell, Assemblyman Gary S. Schaer, a Democrat who chairs the Financial Institutions and Insurance Committee, said last week in a letter to Chief Executive Officer Lloyd C. Blankfein. “New Jersey needs to maximize its presence in the credit markets, not to see its presence undermined.” Schaer wrote.

- Bill Gross, manager of the world’s biggest bond fund, said the U.S. Treasury market is overvalued, with sectors such as bills taking on “bubble” like characteristics. “Treasuries have some bubble characteristics, certainly the Treasury bill does,” Pacific Investment Management Co.’s Gross said in a Bloomberg Television interview from Newport Beach, California. “A Treasury bill at zero percent is overvalued. Who could argue with that in terms of the return relative to the risk? There is no return.”

- Illinois Governor’s Arrest May Hurt Obama Transition.

- East Asian economies will probably expand at the slowest pace in eight years in 2009 as easing export demand and declining investment and consumer spending portend “hard times” for the region, the World Bank said.

- The economy of Russia, the world’s biggest energy exporter, will contract in the first three quarters of next year as oil prices decline and the global credit freeze crimps investment, Barclays Capital said in a report. The economy will grow 0.9 percent overall in 2009, with “negative growth rates” in the first three quarters, the report forecast. Barclays is the first bank to predict that Russia will slide into a recession. The Economy Ministry lowered its forecast for growth to between 6.8 percent and 7 percent on Nov. 24 and the World Bank expects 3 percent.

- Yields on Fannie Mae and Freddie Mac corporate debt fell relative to benchmarks, sending spreads on some maturities to the lowest in almost two months against a measure of expected interbank lending rates. Yields on Fannie’s two-year notes fell to 8.2 basis points below two-year interest-rate swaps, the lowest since Oct. 12, as of 9:30 a.m. in New York, data complied by Bloomberg show. Yields fell below swap rates yesterday for the first time since October, after reaching a record 86.1 basis points on Nov. 20.

- Agrium Inc.(AGU), North America’s third- largest fertilizer producer by market value, will reduce production at plants in North America because of a “significant” increase in inventories. “The late North American harvest, coupled with credit restrictions from international buyers and continued market uncertainties arising from reductions in global crop and nutrient prices, has” reduced nutrient use, Agrium Chief Executive Officer Mike Wilson said in the statement.

- Crude oil climbed more than 2 percent, leading a gain across commodities, on speculation that the economy and energy demand will recover as U.S. lawmakers hammer out a $15 billion bailout of automakers.

Wall Street Journal:

- Governments in the euro area failed to use the recent period of economic growth to clean up their public finances and many of them will post deficits between 5% and 7% of GDP next year, European Central Bank Executive Board member Juergen Stark wrote. Public debt may rise by between 10 and 20 percentage points, he said. European Union rules limit deficits to less than 3% of GDP and set out a target of 60% for the debt-to-GDP ratio.

- Is Walt Disney Co.(DIS) preparing a bid for Electronic Arts Inc.? Disney Chief Financial Officer Tom Staggs appeared to leave the door open Tuesday.

MarketWatch.com:

- For the holiday season through December 7, $15.63 billion has been spent online, essentially the same level compared to the corresponding days last year. During the first week since Cyber Monday (December 1 - December 7), sales totaled $4.45 billion, up 7 percent versus year ago.

Chicago Tribune:

- Barack Obama plans to reach out to Muslim world. Barack Obama says his presidency is an opportunity for the U.S. to renovate its relations with the Muslim world, starting the day of his inauguration and continuing with a speech he plans to deliver in an Islamic capital.

NY Post:

- Though we're only 10 days into the month, sources said a drop in the value of leveraged loans might further pinch Griffin's Chicago-based hedge fund, whose Kensington and Wellington flagships have shed $10 billion year-to-date - nearly half their value.

New York Magazine:

- The Catastrophe Capitalist. In the bleakest stock market of the past 70 years, when hedge funds and 401(k)s alike have cratered, few people are smiling. But short-seller Jim Chanos, whose fund is up 50%, is having the time of his life. He now manages some $7 billion. Trader Monthly estimated his paycheck in 2007 at over $300 million, and he’s on track to earn a similar payout this December. While many Wall Street refugees are liquidating their art collections and listing their trophy houses on the market, Chanos is buying. This summer, he closed on a new $20 million triplex on 75th Street, off Fifth Avenue. He sees China as the next domino to fall in the global meltdown. In recent months, Chanos has loaded up short positions on the infrastructure companies that have rushed to build China’s new highways, bridges, and tunnels. Now he is waiting for their share prices to tank.

MacDailyNews:

- Carton reports, "Overall, one-in-three respondents (33%) plan to buy an Apple laptop over the next 90 days - up 4-pts since September - while 27% plan to buy an Apple desktop, a 1-pt increase." "Moreover, the uptick for Apple is occurring in the context of a rapidly shrinking PC market," Carton reports. "Nonetheless it's not easy to increase market share right during the worst spending environment in years. Thanks to their refreshed line of MacBooks, Apple is doing just that."

Interfax:
- Russia’s inflation rate in the year through Dec. 8 reached 12.7%.

China Daily:

- People from China are visiting the US to buy houses because the mortgage crisis and recession has made real estate cheap, citing specialist Web site Soufun.com.

- China’s port traffic grew at the slowest pace in 10 years in November as the global economic recession curbed trade of consumer goods and commodities, citing the Ministry of Commerce. Traffic expanded .5% from a year earlier to 460 million tons last month. Overseas shipments declined, it said. Imported iron ore fell 21% to 30 million tons.

Bear Radar

Style Underperformer:
Large-cap Value (+1.0%)

Sector Underperformers:
Banks (-2.14%), Telecom (-2.0%) and Insurance (-1.49%)

Stocks Falling on Unusual Volume:
FDX, NKE, ERTS, AXYS, FLIR and MOH

Stocks With Unusual Put Option Activity:
1) ERTS 2) EWY 3) XOMA 4) BUCY 5) ATVI

Bull Radar

Style Outperformer:
Small-cap Growth (+2.52%)

Sector Outperformers:
Oil Service (+5.05%), Steel (+5.0%) and Construction (+4.0%)

Stocks Rising on Unusual Volume:
RTP, CLF, CEO, EAC, MBT, PBR, KTC, HMC, CLMT, TM, AVAV, PSMT, APEI, DRYS, POWL, ALOG, STRL, FMBI, CREE, WMGI, BUCY, PFCB, CHCO, JRCC, WABC, FORR, COCO, FWLT, AXR, ANL, IGW, CHA, DSX, DB and DOM

Stocks With Unusual Call Option Activity:
1) ERTS 2) SYMC 3) MRVL 4) PNRA 5) GRMN