Stocks Finish at Session Lows, Weighed Down by REIT, Financial and Airline Shares

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Stocks Sharply Lower into Final Hour on More Economic Pessimism, Profit-taking and REIT Sector Worries

BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Retail longs, Biotech longs, Internet longs, Computer 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 substantially lower, almost every sector is declining and volume is below average. Investor anxiety is above average. Today’s overall market action is bearish. The VIX is rising .54% and is very elevated at 56.13. The ISE Sentiment Index is below average at 118.0 and the total put/call is slightly above average at .97. Finally, the NYSE Arms has been running above average most of the day, hitting 1.74 at its intraday peak, and is currently 1.35. The Euro Financial Sector Credit Default Swap Index is falling 2.14% today to 128.33 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 4.42% to 258.24 basis points. The TED spread is falling 4.91% to 199 basis points. The TED spread is now down 267 basis points in two months. The 2-year swap spread is down 4.32% to 105.25 basis points. The Libor-OIS spread is falling 6.49% to 172 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is unch. at .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 unch. today. Banks and REITs are especially weak today and have helped drag down the broad market on light volume. Small-caps and cyclicals, which have been recent winners, are also under meaningful pressure. I would anticipate meaningful weakness in Asia tonight, which could further pressure US share tomorrow morning. The ongoing improvement in gauges of credit angst remains a big positive. I suspect this light volume stock sell-off will be short-lived and the rally will resume into year-end. Nikkei futures indicate a -90 open in Japan and DAX futures indicate a -44 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on more economic pessimism, REIT sector worries, shorting and profit-taking.

Today's Headlines

Bloomberg:
- The International Energy Agency, an adviser to 28 nations, said global oil demand will contract this year for the first time since 1983 and cut its outlook for 2009. Consumption worldwide will shrink in 2008 by 200,000 barrels a day, or 0.2 percent, the IEA said in a monthly report today. The reduction in demand is concentrated in developed economies in the Organization for Economic Cooperation and Development, where oil use will tumble 3.3 percent. In the fourth quarter of this year demand will shrink by 1.6 million barrels a day, or 1.8 percent. Next year consumption worldwide will increase by 400,000 barrels a day, or 0.5 percent, to 86.3 million barrels a day, according to the report. Next year’s oil demand growth may be wiped out if the economic slump deepens, the agency said.

- Saudi Arabia, the world’s biggest oil exporter, cut production more than traders and analysts had estimated last month, reflecting the nation’s commitment to halt the $100 plunge in crude prices. Oil rallied after Oil Minister Ali al-Naimi said in an interview in Poznan, Poland, that the kingdom pumped 8.493 million barrels of oil a day in November. That’s 287,000 barrels a day less than estimated by the International Energy Agency, and close to Saudi Arabia’s OPEC quota of 8.477 million barrels.

- Russians Buy Jewelry, Hoard Dollars as Ruble Plunges.

- China faces deflation next year as food and commodities prices have plunged, which will prompt the central bank to cut interest rates further, according to Goldman Sachs Group Inc. and JPMorgan Chase & Co.

Wall Street Journal:

- Among the hundreds of hours of conversations involving Illinois Gov. Rod Blagojevich secretly recorded by the FBI since Oct. 22, one phone call is drawing particular scrutiny among politicos, journalists and others in Washington. It was a marathon conference call on Monday, Nov. 10. The call lasted about two hours. On the phone were Mr. Blagojevich, his wife, his general counsel, an unnamed adviser, and John Harris, the governor’s chief of staff and his co-defendant in this week’s case. But what’s drawing the most interest is who was on the line from Washington, and the sequence of political events that followed that same night and in the ensuing days regarding Barack Obama’s close friend and adviser, Valerie Jarrett.

- Former Senate Majority Leader Tom Daschle will pull double duty in the Obama administration, where he will serve not only as the Health and Human Services secretary but also oversee a new White House Office of Health Reform.

MarketWatch.com:

- NYSE Euronext (NYX) is working to register a U.S. trust bank, regulated by the Federal Reserve, to function as a clearinghouse for credit derivatives trades in the U.S., according to the exchange's chief executive. Duncan Niederauer said Thursday that not owning a U.S.-based clearing operation puts NYSE Euronext at a disadvantage as it tries to catch up with U.S. derivatives exchanges CME Group Inc. (CME) and IntercontinentalExchange Inc. (ICE) , which are readying their own clearing platforms for credit-default swaps in the U.S.

NY Times:
- The Service Employees International Union has long boasted that it is on the cutting edge of the labor movement. But it found itself badly embarrassed this week when it was linked by name to Gov. Rod R. Blagojevich’s maneuvering to secure some financial gain from picking the next Senator from Illinois.

Chicago Tribune:

- Days before Gov. Rod Blagojevich announced a $1.8 billion tollway construction program on Oct. 16, he privately tipped a fundraiser to the plan and said he expected a major highway contractor to raise $500,000 for his campaign fund, according to a FBI recording. Secretly recorded by FBI agents, the conversation forms the basis for one of the "pay to play" allegations against Blagojevich outlined Tuesday by federal prosecutors.

hedgeweek:

- A sharp spike in investor risk aversion had a significant impact on hedge funds investing the emerging markets in the most recent quarter, according to Hedge Fund Research. The HFRI Emerging Markets (Total) Index declined nearly 29 per cent in the four-month period ending 31 October. Mirroring trends across the global hedge fund industry, investors redeemed over USD5.2bn in capital from funds investing in emerging markets.

FINalternatives:

- Beverley Hills, Calif.-based Canyon Capital Advisors has seen better days. In fact, the $19 billion hedge fund, founded by Drexel Burnham Lambert veterans Joshua Friedman and Mitchell Julis, is having its worst year ever, in line with the many of its peers. According to public databases, the firm’s $55 million Capital Arbitrage Fund and Canyon Value Realization Fund, a $2.9 billion multi-strat offering, are down 25.14% and 39.02%, respectively, through October. Its Balanced Equity Fund, a $268 million long/short equity offering is down 15.71% through September.

Denverpost.com:

- After an 18-month rulemaking marathon, Colorado adopted the most comprehensive state oil and gas drilling regulations in the nation Wednesday. Republican lawmakers, however, already are vowing to make changes. "We cannot afford to push the energy industry out of Colorado, given the current state of the economy," House Minority Leader Mike May, R-Parker, said. "And many fear that the proposed rules will do just that."

AppleInsider:

- In an unexpected move Thursday, AT&T(T) began accepting online orders for Apple's(AAPL) iPhone 3G, allowing customers to have the device shipped to their doorstep for activation within the comfort of their own homes.

Reuters:
- California's budget crisis is growing worse as its shortfall for its current fiscal year has increased to an estimated $14.8 billion from a previously estimated $11.2 billion, Gov. Arnold Schwarzenegger said on Wednesday. During a press conference broadcast on his office's website, the Republican governor said he would call top lawmakers into a meeting to stress the need for fast action by the Democrat-led legislature on balancing the budget of the government of the most populous U.S. state because it may be out of cash by the end of February.

International Herald Tribune:

- California air regulators meet Thursday to consider the most sweeping plan to reduce greenhouse gas emissions in the United States, one that will transform how people travel, utilities generate power and businesses use electricity. The strategy chosen by air regulators will create 31 new regulations affecting all facets of life, from what fuels Californians put in their vehicles to what kind of air conditioners businesses put in their buildings. The average Californian, for example, can expect to pay to have their car tires inflated during oil changes and should expect to pay higher power bills as utilities try to increase their use of renewable energy. They also could see more fuel efficient cars at dealerships, better public transportation, housing near schools and businesses, and utility rebates to equip their homes to be more energy efficient. New fees and reporting requirements will accompany the emission rules. Republicans, small businesses and major industries that will be forced to change their operations beginning in 2012 say jobs could be lost, companies might leave the state and energy prices will skyrocket. The air board's background work has been criticized in reviews by California's nonpartisan legislative analyst and independent scientists, with both groups saying the costs to the state could be greater than projected.

Le Figaro:
- European Central Bank council member Christian Noyer told Le Figaro in an interview that inflation expectations have declined and that inflation readings may be negative in some months.

Berliner Zeitung:

- German carmakers are seeking funding from the US auto-industry aid program, citing Matthias Wissmann, president of the German car manufacturers’ group VDA. Automakers such as Daimler AG and BMW, which have plants in the US, should be given the same opportunities as American automakers under the program, citing Wissmann.

Vedomosti:

- Russian rail shipments may fall 28% this month.

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Folha de Sao Paulo:

- Brazil’s new-vehicle sales in the first week of December fell 7.7% from a month earlier.

Bear Radar

Style Underperformer:
Small-cap Value (-1.66%)

Sector Underperformers:
REITs (-5.16%), Airlines (-5.1%) and Banks (-4.69%)

Stocks Falling on Unusual Volume:
CBT, WBSN, LZ, DRYS, URBN, ISYS, HBI, KCI and CBT

Stocks With Unusual Put Option Activity:
1) TEX 2) VVUS 3) AMX 4) XOMA 5) ELNK

Bull Radar

Style Outperformer:
Mid-cap Growth (+.52%)

Sector Outperformers:
Steel (+2.73%), Oil Service (+2.70%) and HMOs (+2.43%)

Stocks Rising on Unusual Volume:
NFX, DNR, HES, PBR, HMC, VIV, SGP, GEOY, LLY, TM, PHG, PEGA, SAY, BBV, LHO, BIDU, AMLN, POWL, LAYN, IIVI, CRXL, ERTS, ONXX, MASI, JRCC, SSRI, SINA, NETL, VNUS, XPH, XSD and GEF

Stocks With Unusual Call Option Activity:
1) HL 2) GFI 3) STLD 4) SLW 5) NTES

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