Wednesday Watch

Late-Night Headlines
Bloomberg:

- Blackstone Group LP(BX), the world’s largest private-equity firm, plans to combine its distressed securities hedge funds and spin off a stock fund to cut costs as the credit shortage makes buyouts almost impossible to finance.

- California single-family home sales rose 83 percent in November and the median price fell below $300,000 for the first time since 2002 as buyers bought properties in foreclosure, the California Association of Realtors said.

- Online spending rose to $677 million in the U.S. last weekend, almost twice the total spent last year on the final weekend before Christmas, ComScore Inc. reported.

- The Financial Industry Regulatory Authority, formed by the merger of the NASD and the New York Stock Exchange’s oversight unit, was accused in a lawsuit of misleading NASD members over $35,000 payments to each of them.

Wall Street Journal:

- After 18 tempestuous months with Citigroup Inc., the managers of hedge fund Old Lane Partners LP are looking for a fresh start.

- Vice President-elect Joe Biden released new details on the incoming administration's planned stimulus package, saying 85% of the three million jobs to be generated would be in the private sector and that no pet projects of lawmakers would be accepted.

- Clinton’s Donor List Raises Lots of Questions. Can’t the United Way find better uses for its money?

- Rep. Pete Stark, chairman of the House Ways and Means Committee's health panel, will be an important player as Washington tackles health care next year. But his blunt criticism of opponents and his positions to the left of many other Democrats promise to make the process bumpier.

South Florida Business Journal:

- In contrast to the national trend, Florida's existing home sales rose in November – the third month in a row. Statewide sales rose by 4 percent over last year, according to the latest housing data released by the Florida Association of Realtors.

Financial Times:
- GAM, one of the biggest investors in hedge funds, will allow clients to withdraw from most of its funds of hedge funds only once a quarter rather than once a month, as the industry tightens redemption terms. GAM, which is owned by Swiss bank Julius Baer, has been hit by redemptions and losses, leading assets under management to fall about a third this year, according to people familiar with the group. GAM’s assets fell 20 per cent in the first six months to $63bn.

People’s Daily:

- China won’t weaken the yuan to spur exports, citing Commerce Minister Chen Deming.

Late Buy/Sell Recommendations
- None of note

Night Trading
Asian Indices are -1.0% to +.50% on average.
S&P 500 futures -.02%.
NASDAQ 100 futures -.04%.

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Earnings of Note
Company/EPS Estimate
- None of note

Economic Releases
8:30 am EST

- Personal Income for November is estimated unch. versus a .3% gain in October.

- Personal Spending for November is estimated to fall .7% versus a 1.0% decline in October.

- The PCE Core for November is estimated unch. versus unch. in October.

- Durable Goods Orders for November are estimated to fall 3.0% versus a 6.2% decline in October.

- Durables Ex Transports for November are estimated to fall 3.0% versus a 5.4% decline in October.

- Initial Jobless Claims for last week are estimated to rise to 558K versus 554K the prior week.

- Continuing Claims are estimated to rise to 4410K versus 4384K prior.

Upcoming Splits
- None of note

Other Potential Market Movers
- The weekly MBA mortgage applications report and weekly EIA energy inventory report could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by automaker 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 75% net long heading into the day.

Stocks Finish Lower, Weighed Down by Financial, Semi, Gaming and Homebuilding Shares

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In Play

Stocks Lower into Final Hour on Global Growth Worries, Financial Sector Pessimism

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Retail longs. I haven’t traded 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 declining and volume is very light. Investor anxiety is above average. Today’s overall market action is mildly bearish. The VIX is rising .58% and is elevated at 44.77. The ISE Sentiment Index is about average at 140.0 and the total put/call is below average at .76. Finally, the NYSE Arms has been running high most of the day, hitting 1.55 at its intraday peak, and is currently 1.25. The Euro Financial Sector Credit Default Swap Index is falling .23% today to 114.25 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 1.25% to 210.84 basis points. The TED spread is falling .96% to 146 basis points. The TED spread is now down 320 basis points in just over two months. The 2-year swap spread is down 4.30% to 66.75 basis points. The Libor-OIS spread is rising 1.47% to 124 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is up 3 basis points to .11%, which is down 250 basis points in just 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 .00%, which is unch. today. A number of market-leading stocks are in positive territory today despite the broad market’s low-volume decline. Financials are heavy again today. Brazilian stocks are also notably weak, falling 3%. The Bovespa is 9% lower over the last five days. I still expect another surge higher in US stocks to occur over the next few days. Nikkei futures indicate a -168 open in Japan and DAX futures indicate an +26 open in Germany tomorrow. I expect US stocks to trade modestly higher into the close from current levels on lower energy prices, diminishing credit market angst, bargain-hunting and short-covering.

Today's Headlines

Bloomberg:
- Tax lawyers are urging private- equity and hedge-fund clients to restructure their partnerships so they can sidestep the higher taxes that President-elect Barack Obama has vowed to impose on their profits. Obama’s promise to revive a failed 2007 bill forcing executives to pay rates of 35 percent or more instead of the 15 percent capital-gains tax has prompted lawyers to advise the firms to take measures such as setting up offshore entities. That would help circumvent higher taxes on so-called carried- interest profits that executives at the firms typically earn.

- Jeffrey Gendell, whose investment firm Tontine Associates LLC is liquidating two hedge funds after losses of more than 60 percent this year, plans to start a new fund in February.

- The cost of protecting European corporate bonds from default fell, according to traders of credit-default swaps. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-risk, high-yield credit ratings dropped 25 basis points to 1,010, according to JPMorgan Chase & Co. prices at 3:49 p.m. in London.

- Food inflation may fall to no more than 4.5 percent in 2009 as lower dairy costs give consumers relief from this year’s price gains, the highest in almost three decades, the U.S. Department of Agriculture said. The forecast for lower inflation, estimated at as high as 6 percent this year, follows declines in commodity prices from records set earlier this year, the USDA said today in a monthly report. Crude oil, a major determinant of transportation costs, has plunged 74 percent from a record $147.27 a barrel in July, based on New York trading. Corn, wheat and soybean prices all have dropped at least 46 percent from all-time highs this year.

- American Express Co.(AXP), the credit- card company that’s converting into a bank, plans to sell $3.39 billion in securities to the U.S. Treasury’s Troubled Asset Relief Program.

- Vice President-elect Joe Biden said the incoming Obama administration and congressional leaders are nearing an agreement on the broad principles of an economic- stimulus package.

- Thierry Magon de La Villehuchet, who ran a fund that invested with Bernard Madoff, was found dead at his office today in an apparent suicide, according to a police officer at the scene. De la Villehuchet, 65, was a co-founder and chief executive officer of Access International Advisors, according to a marketing document. Access, based in New York, invested $1.4 billion with Madoff, who was arrested on Dec. 11 for allegedly running a $50 billion Ponzi scheme.

- Russia, Iran and other countries with the world’s biggest natural-gas reserves agreed to coordinate forecasts, investments and relations with consumers to defend their market interests amid volatile energy prices. The 15-member Gas Exporting Countries Forum, which adopted a charter in Moscow today, will locate the headquarters of its new secretariat in Doha, Qatar, the biggest source for world liquefied natural gas shipments. Western consumer countries have warned against a “gas OPEC” modeled after the Organization of Petroleum Exporting Countries.

- New York City felonies have dropped 4 percent in 2008 compared with last year, a likely 18th consecutive annual decline in major crime, the Police Department reported. Although the city’s 501 murders as of Dec. 21 represent a 5.2 percent increase over last year, the total remains the second-lowest since 1961, when the city began such tabulations. Overall, crime has fallen 28 percent since 2002, when Mayor Michael Bloomberg took office and felony assaults reached record lows, the department said. Virtually every category of crime decreased in all five boroughs this year.

Wall Street Journal:

- A New York woman who lost nearly $2 million investing with Bernard Madoff has filed a claim against the Securities and Exchange Commission alleging the agency was negligent in failing to detect an alleged decades-long fraud. The administrative claim for relief was filed with the SEC on Monday and is believed to be the first attempt by an investor to recover lost money from regulators.

CNBC.com:
- Cerberus Capital Management LLC suspended withdrawals from its Cerberus Partners Fund. Redemptions were halted for as long as a year.

Charlotteobserver.com:

- Pending today's shareholder vote, Wachovia Corp. is set to officially become part of Wells Fargo & Co. on New Year's Eve, but behind the scenes, the transition is already taking shape.

AppleInsider:

- A new-generation of NVIDIA-based iMacs are due to begin shipping out of China sometime next month, according to a new report out of the Far East.

Kommersant:

- Russia will boost defense orders 28% next year and add 70 strategic missiles by 2011.

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Ekho Moskvy:

- The number of unemployed people in Russia will rise to 10 million next year, or more than 10% of the country’s workforce, former Prime Minister Mikhail Kasyanov said. Russia’s inflation rate will reach as much as 15% even as industrial output and gross domestic product shrink amid the government’s inability to cope with the financial crisis, Kasyanov said. The ruble will weaken to 35 rubles versus the dollar, said Kasyanov, Vladimir Putin’s prime minister from 2000 to 2004.

Bear Radar

Style Underperformer:
Small-cap Value (-1.43%)

Sector Underperformers:
Semis (-2.96%), Road&Rail (-1.86%) and Oil Service (-1.79%)

Stocks Falling on Unusual Volume:
SA, KOP, SNP, WFSL, SINA, ASIA, ABFS, RMBS, CSS and TXT

Stocks With Unusual Put Option Activity:
1) AMAG 2) CAM 3) CYPB 4) ABT 5) WMB

Bull Radar

Style Outperformer:
Mid-cap Growth (+1.22%)

Sector Outperformers:
Insurance (+2.13%), Steel (+1.90%) and Construction (+1.77%)

Stocks Rising on Unusual Volume:
UBS, CNA, MRK, ENL, SCHS, AXYS, NNDS, ACET, ROCM, OTEX and IGM

Stocks With Unusual Call Option Activity:
1) SBUX 2) VMW 3) MRK 4) BSX 5) PNC